Company car tax - what you need to know

10/01/2022

Company car tax - what you need to know

The issue of company car tax is an important consideration for fleet managers, employees and business owners when leasing a car for business use.

Put simply, company car tax is levied on a proportion of the car’s price - that's the initial value and will include the car’s optional equipment – and the fuel type and its emissions.

The tax also takes into account what the car is being used for and how it is being paid for.

Also, the percentage that is levied is determined primarily on the car’s CO2 emissions which has seen a surge in company car drivers switching to low-emission cars that are being leased in the UK.

Indeed, the company car tax will encourage company car drivers and their employers to choose a car with a lower level of CO2 emission and the tax acts as an incentive.

 

What is company car tax?

For those asking, ‘What is company car tax?’, then here is a detailed explanation.

The tax on a company car is calculated on a proportion of the car's official price.

This is what's known as the P11D and is an acknowledgement that an employee will get the benefit of driving a new car without having to pay for it.

This then is the Benefit-in-Kind (BiK) and this determines the tax that a person will pay and it is collected via the employee’s PAYE system from their salary.

This means that the tax is based on the P11D value and is multiplied by the employee’s appropriate BiK rate – which is determined by the car's fuel type and CO2 emissions, along with the employee’s rate of income tax.

It may sound complicated, but it isn’t really!

The other issue to consider is the employee’s income tax rate, for instance, if they pay a basic rate of 20%, the higher rate of 40%, or the additional rate of 45%, means that the car may become more expensive for the additional ratepayer.

This is illustrated using this example:

  • The vehicle P11D is £15,000
  • This figure is multiplied by the tax rate for the car CO2 emissions, for example, this could be 15%
  • This delivers a BiK rate of £2,250.
  • The employee then multiplies this figure by their income tax rate - 20% as a basic rate payer – so they will pay £450 in tax. For a higher rate taxpayer, this amount will be £900 (that’s £2,250 * 40%).

What are Benefit-in-Kind rates?

The Benefit-in-Kind rates are crucial to company car drivers, and these are laid down by the Chancellor in their budget.

Currently, the BiK rates for electric cars start at 1%, and for the greenest hybrids, they start at 22% and for any vehicle with emissions of more than 100g/km the figure is 24%.

The BiK rates have incremental increases of 1% from the 13% tax band to a maximum rate of 37%.

However, these rates are increasing and for 2022-23, the BiK rate for zero-emissions vehicles will rise to 2% and will remain at that rate until 2024.

For a vehicle with CO2 emissions of between 1g/km and 50g/km but a battery-powered range of less than 30 miles, the BiK rate is 13%, and this rises to 14% from April 2022 until 2024.

There are more details on the Government' website explaining more about the tax on employees' cars.

 

Other benefits and costs to the employer

One of the issues for Benefit-in-Kind is that since it's an employee benefit, the employer is then liable for paying Class 1a National Insurance Contributions (NICs) which will be based on the car's P11D value and the current BiK rate.

The employer will also need to understand the standard allowance as part of the capital expenditure that can be considered.

Also, some new ultra-low emissions vehicles will be eligible for a 100% write-down in their first year under the enhanced capital allowances scheme.

Benefit in kind tax

Essentially, no one will want to pay more tax than is necessary, so understanding your benefit in kind rate and how it impacts your company car tax bill is important.

Don't forget too that if an employer is paying for fuel that will be used for personal journeys, then the employee will need to pay tax on that as well.

The easiest way to achieve the best benefit in kind tax rate is to move to a hybrid or a full electric car-the lower the emissions, the better the be IK tax rate is.

Should you have any questions, then either ask your employer or discuss which type of company car lease you could enjoy with Tilsun Leasing by calling them on 0330 040 888.

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