The Tax Implications of Having a Company Car

Updated: 1 April 2019

A company car can be a great perk. Just make sure you know the tax implications of a company car.

Here's what you need to know to satisfy the HMRC.

What are the tax implications of a company car?

A company car has the following features:

• It belongs to your employer or to your business (for example if you trade as a limited liability company)
• You use it for both business-related and personal travel
• You take it home with you
• The HMRC considers it to be a benefit in kind. It forms part of your income and you have to pay tax on it

Implications for employees: How do I calculate company car tax

If you’re an employee, your employer will deduct any company car tax due to HMRC at source. Similarly, you’ll need to deduct company car tax at source if you’re self-employed but trade as a limited liability company.

Company cars are taxed at different rates, depending on:

• The car’s taxable value, known as the P11D value
• Carbon dioxide (CO2) emissions
• Engine type — petrol, diesel, hybrid or electric
• Your income tax bracket

Company car tax calculation: Example

Let’s say your company car has a P11D value of £15,000. You found this out using HMRC’s company car and car fuel benefit calculator.

According to the manufacturer, the car emits 50 grams of CO2 per kilometre. It has a petrol engine. Your highest rate of income tax is 20 percent.

To calculate how much tax you pay on your company car, you must:

• Find out the car’s P11D value.
• Multiply the P11D value by the company car tax rate. Since the car emits 50g/km of CO2 and has a petrol engine, the rate in this case is 9 percent.
• Multiply the above answer by your highest personal tax rate. In this case, this is 20 percent.

So, the amount of tax payable on your company car is: (15,000 x 9 percent) x 20 percent = £270

Company car tax implications for sole traders

By definition, a company car belongs to your employer. There’s no concept of company car — and therefore no company car tax to pay — if you’re self-employed as a sole trader. This is because there’s no legal difference between you and your business.

That said, you can deduct part of your car’s running costs using one of the following methods:

Method 1: Mileage allowance

• Keep a log of your business-related mileage
• Multiply this mileage by HMRC’s approved mileage allowance payment (AMAP)
• Claim the resulting sum on your self-assessment tax return

Method 2: Actual expense

You can only use the actual expenses method to claim a mileage deduction if you’ve never claimed using the AMAP rates. You can only switch method if you change your vehicle.

• Step 1: Tot up the cost of fuel, servicing, car insurance, VED and the cost of any repairs you made during the tax year.
• Step 2: Find out your business use percentage. To do this, divide your business mileage by your total mileage and multiply by hundred.
• Step 3: Multiply the total in step 2 by the percentage in step 3 to find your total mileage deduction.
• Step 4: Deduct the full cost of any tolls, parking fees or congestion charges you’ve incurred on a business journey.