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UK Company Vehicle Tax Overview

In the United Kingdom a company vehicle is considered a very good job perk, but one which accrues its own separate level of taxation. You will be liable to pay tax for use of this vehicle for commuting and for any additional private use by yourself or your family; this is known as a “benefit-in-kind” (BiK). Despite this, around one million UK employees currently use company owned vehicles as a regular part of their job and daily lives.

Company cars

The level of tax you will pay depends on several factors, including the car’s value, your personal tax band, what type of fuel the vehicle uses, and its emissions level.

An expensive, high-emitting vehicle driven by a high-income earner will thus typically attract far more taxation than a cheaper vehicle driven by someone on a lower income.

Conversely, there are various ways to reduce the taxation level, and you should also notify HMRC immediately if anything changes relating to your company car ownership.

Let’s firstly consider what contributes to the costs of a company car, and how the taxable rate is worked out.

Firstly, you need to work out the car’s P11D value. This is its total price (including list price, VAT, delivery, and additional costs excluding the registration charge) multiplied by a band percentage determined by its CO2 emissions levels.

Once you have calculated this value you multiply that figure by your personal income tax band (e.g. 20%, 40% or 45% for residents in England and Wales, and the relevant band for Scottish residents). There are additional surcharges for other things, such as a premium for drivers of diesel cars to factor in the environmental impact of nitrogen oxide emissions.

Currently the BiK premium for diesel car drivers is 4% above that accrued by petrol vehicle drivers. The vehicle’s assigned value decreases if you only drive it part-time or if you pay a sum towards its regular ownership or if the emissions values are very low.

Calculators are available on the HMRC website to help work out your benefit-in-kind value depending on different circumstances.

Electric and hybrid vehicle drivers are also taxed differently. Hybrids with CO2 emissions under 50g/km the P11D value is based on the vehicle’s “electric range” or distance it can travel on purely electric power.

The banding value assigned to vehicles is also updated on an annual basis. For the 2020/21 tax year, all electric vehicles are assigned to the 0% tax band, and this will not rise above 2% until at least 2023/24.

In most cases company car tax is taken from an employee’s salary on a monthly basis. For this reason, it is important to notify HMRC of any changes to the vehicle, its usage, or if you stop using the vehicle entirely. By choosing the right vehicle for your requirements, it is possible to lower your tax liability.

It’s also important to let HMRC known if your employer pays for any fuel you use on personal journeys, as this is taxable separately.

If you are considering the benefit or penalties of company car ownership, it’s also worth checking to see if your employer can alternatively provide a car allowance in its place.

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That essentially means your employer would contribute to the running costs of your own vehicle, but this has its own set of pros and cons.

For example, a company car would generally be serviced and maintained by your employer and is usually changed every few years, whereas you’d be solely responsible for the usual costs of maintaining your own vehicle above and beyond any allowance.

However, your employer could also restrict the range of cars on offer through its car scheme, leaving you with a vehicle you may not feel especially happy with.

Whatever decision you make with regard to owning or contributing towards a company vehicle, it’s well worth doing your research in advance to work out your potential tax burden or benefit.

Don’t forget, if you work or run a business in the motor trade industry, you may need to factor in other charges when purchasing motor trade insurance, such as motor trade liability insurance, breakdown recovery insurance and possibly garage insurance.