One of the most attractive benefits an employer can offer is a company car. Employees lucky enough to receive this perk will be given a car to use for both business and personal use. This is normally given to employees that do a lot of travel for their work. An example of this is a regional sales manager that travels between premises.
Of course, this helps keep living costs down, as you can use this company car in your daily life - instead of buying or hiring a personal vehicle. Traditionally cars would be bought wholesale and given to employees who had little say on the decision. But, in more modern times car lease specialists can allow employees to choose from a list of employer-approved cars.
However, as the old adage goes - there is no such thing as a free lunch. This is because the privilege of a company car is paid for in taxes - taken straight from your wages. This is known as company car tax, but how does this car tax work?
An employee will pay tax on any employment benefits including a company car. As well as a company car, this includes accommodation and loans. Company car tax is deducted from your pay using the Pay As You Earn (PAYE) system.
With this in mind, it is important to know how much company car tax you are expected to pay. This better allows an employee to budget and select a company car they can afford.
How much does company car tax cost?
A multitude of variables will decide how much company car tax you are expected to pay. One of the main factors taken into consideration is your annual earnings. With growing climate awareness, CO2 emissions also play a large part in company car tax calculation.
The CO2 emissions bracket along with the P11D value of the car help decide how much tax you will pay. Furthering these green CO2 emissions initiatives a diesel car will accrue more tax. Diesel cars will pay tax with an extra surcharge of 4%. Petrol and electric cars do not need to pay this added CO2 emissions tax.
A company car tax calculator will sort vehicles into CO2 emissions bands. Driving data by the Worldwide Harmonised Light Vehicle Test Procedure is used to calculate fuel efficiency and CO2 emissions. Again, this will help define how much company car tax you will pay. Therefore, for those on a budget, it may be wise to select vehicles with low car emissions, such as fuel-efficient petrol cars, or even electric cars.
Furthermore, the P11D value of your car is added to your yearly salary to calculate how much company car tax you pay. This is where the benefit of a company car can become a heavy burden. This is because the list price of the car can push you into a higher income tax bracket. For example, if you are on the higher end of the basic income tax rate of 20% a company car with a high P11D value could push you into the next income tax bracket. This means the P11D value of the car could double your income tax to 40%.
So what are the company car tax bands?
Petrol-powered and hybrid-powered cars for the tax year 2021 to 2022
HM Revenue & Customs have listed company car tax bands into the following categories:
| CO2 emissions g/km | Electric mileage range | NEDC % | WLTP % |
| 0 | – | 1 | 1 |
| 1 to 50 | 130 and above | 2 | 1 |
| 1 to 50 | 70 to 129 | 5 | 4 |
| 1 to 50 | 40 to 69 | 8 | 7 |
| 1 to 50 | 30 to 39 | 12 | 11 |
| 1 to 50 | less than 30 | 14 | 13 |
| 51 to 54 | – | 15 | 14 |
| 55 to 59 | – | 16 | 15 |
| 60 to 64 | – | 17 | 16 |
| 65 to 69 | – | 18 | 17 |
| 70 to 74 | – | 19 | 18 |
| 75 to 79 | – | 20 | 19 |
| 80 to 84 | – | 21 | 20 |
| 85 to 89 | – | 22 | 21 |
| 90 to 94 | – | 23 | 22 |
| 95 to 99 | – | 24 | 23 |
| 100 to 104 | – | 25 | 24 |
| 105 to 109 | – | 26 | 25 |
| 110 to 114 | – | 27 | 26 |
| 115 to 119 | – | 28 | 27 |
| 120 to 124 | – | 29 | 28 |
| 125 to 129 | – | 30 | 29 |
| 130 to 134 | – | 31 | 30 |
| 135 to 139 | – | 32 | 31 |
| 140 to 144 | – | 33 | 32 |
| 145 to 149 | – | 34 | 33 |
| 150 to 154 | – | 35 | 34 |
| 155 to 159 | – | 36 | 35 |
| 160 to 164 | – | 37 | 36 |
| 165 to 169 | – | 37 | 37 |
| 170 and above | – | 37 | 37 |
These company car tax bands are also known as benefit in kind tax, or bik tax. As you can see company car tax is directly related to how much C02 your company car emits.
However, as pointed out by RAC this bik tax is significantly higher for diesel engines:
| CO2 (g/km) | 2019/20 BIK rate% (Diesel) |
| 0-50 | 20 |
| 51-75 | 23 |
| 76-94 | 26 |
| 95-99 | 27 |
| 100-104 | 28 |
| 105-109 | 29 |
| 110-114 | 30 |
| 115-119 | 31 |
| 120-124 | 32 |
| 125-129 | 33 |
| 130-134 | 34 |
| 135-139 | 35 |
| 140-144 | 36 |
| 145-149 | 37 |
| 150-154 | 38 |
| 155-159 | 39 |
| 160-164 | 40 |
| 165+ | 41 |
Please note, diesel cars are exempt from the 4% tax payable charge if they meet the standards of the Real Driving Emissions Step 2.
How is company car tax calculated?
Working out how much tax company cars owe can be a complex affair. C02 emissions are not the only factor to consider when paying tax. The percentage given by the above tax bands is multiplied by the P11D value (RRP) of the vehicle.
Calculating tax can be done by multiplying the CO2 bracket (benefit in kind bracket) by the P11D value. This gives a Benefit in Kind value or Bik rate.
This Bik rate (value) is measured against the driver's income tax bracket to give the total tax bill of the company car.
When you are given a company car, it means you are not tied down to a contract like a hire purchase contract. As the employer pays for the lease it means they are financially responsible for the contract.
This also means an employee is not responsible for a company car's bills. The employer is usually responsible for, insurance, maintenance, MOT, and servicing obligations.
However, a company car scheme often leaves you with limited options. For example, following a classic model employers will only offer a set company car as they get benefits for buying in bulk. And, even when they give you options it is often strictly limited.
This means that connoisseurs of the best cars may be disappointed and opt-out of the incentive. It also means you never actually own the vehicle. If you lose your job you lose your car. And, if times get tough you do not have that asset to sell off.
Depending on the cash value of the vehicle and your wages a company car could also push you into a higher income tax band.
What are the benefits of electric company cars?
Perhaps the best company cars can be found in the electric range. The company car benefit of an electric car is in the taxable benefit. For the 2021 -2022 financial year a driver will pay a Bik rate of only 1%.
Hybrid cars have similar tax rules as they are cheaper than a petrol car, or a diesel engine vehicle. The Bik rate can be around 8%-14% on average.
This is not to mention that the UK and other countries are set to phase out oil imports from Russia following the Ukraine conflict. This means petrol prices are soaring beyond the already historic highs. This means that electric vehicles which are already cheaper than petrol cars will become even more invaluable. An electric range will also cut carbon dioxide emissions while you save money.
Furthermore, the UK along with other countries are trying to phase out fuel cars for good. The Uk aims to stop producing petrol cars after 2030. It might be important to remain ahead of the curve in terms of ownership.
Company cars are often seen as the pinnacle of employee perks. Who can grumble at a free car? However, like many things the benefits are not so straightforward. For example, company cars have tax implications. Tax is taken straight out of an employee's wages using the PAYE system as all company cars are tax charged.
How much you pay depends on a variety of factors such as the car's fuel economy. Using this, your wages and the car's P11D value (car's list price) a calculation will assign the vehicle a tax band or tax bracket.
As to be expected electric cars have lower tax rates because of the lower C02 emissions. Hybrid cars usually have lower tax rates in comparison to petrol and diesel cars.
There are many benefits to owning a company car. This includes not being financially responsible for the car's lease. Any further bills are usually the responsibility of the employer also including MOT, maintenance, servicing, and insurance.
However, you are given selected options to choose from if you have a choice at all. It also means you never truly own the car, so if you leave the company you lose the vehicle. It is also important to check how a company car will affect your income tax level. It might not be worth it if the value of the car pushes you into a higher tax band.