It’s that time of year again – time to update your company car tax payments. As usual, it’s complicated…
Is company car tax changing?
The short answer is ‘yes’. Company car tax changes every year. But first let’s do a quick recap of the current rules so you can see what the changes are and how they will affect you.
Firstly, what is company car tax?
Well, it is a tax paid by employees who drive vehicles owned by the company they work for. It is deducted at source – meaning that employers deduct this tax from their employees’ wages as part of the Pay As You Earn (PAYE) scheme. It is recorded on a P11D form and sent to HMRC.
So, who actually pays for it?
Employees pay it through ‘salary sacrifice’. This means it is deducted from your salary in the form of ‘Benefit in Kind’ (BiK) tax. A BiK is any non-cash perk you receive as an employee that isn’t included in your actual salary. Remember this term – it is very important when calculating company car tax rates.
You pay company car tax if you:
- Drive a car that belongs to your employer
- Are self-employed and registered as a limited liability company (this makes you the employee of your company)
- Are an employer: you pay Class 1A National Insurance and have to file a P46 car tax form for every company vehicle
First, we’ll look at the tax rate changes, then we will look at how they apply to your company car tax.
Currently, in the 2018-2019 tax year, the basic personal income benefit allowance is £11,850 per year for the basic tax code level. This is the amount you can earn before you have to pay any income tax. The code in this example is 1185L. This is shown on your pay slip as your tax code.
The most common tax code for people born after 5 April 1938 is 1060L, but this can change each tax year when personal allowance increases. Other tax codes have different income benefit allowances, so it is important to know yours. This tax-free personal allowance changes if you have extra non-cash ‘extras’ in addition to your income – like a company car.
How will the personal tax allowance change for the tax year 2019-2020?
As of 6 April 2019, new rules will apply. On the one hand it is good news: the basic personal tax allowance has increased to £12,500, meaning you can now earn an extra £650before starting to pay tax. Nice.
But that’s not all you need to know. The second part of the company car tax rate calculation involves your car’s carbon dioxide (CO2) emissions.
And the downside is an increase in the percentage that you pay in relation to your vehicle’s CO2emissions. The increase is 3% on petrol car CO2 emissions and 4% on diesel CO2emissions. The final percentage is capped at 37% for both types of car.
In addition, there is a surcharge on diesel cars, which has risen from 3% to 4% for this tax year (up to a maximum of 37% of P11D price). Bringing us neatly to the next question…
How does company car tax work?
Company car tax rates vary depending on:
- The taxable value of the car: every car has a P11D value. It is calculated according to the list price of the car (incl. VAT) and any delivery charges less the car registration fee and road tax/vehicle excise duty (VED)
- Your car’s carbon dioxide emissions
- The amount of time the car is unavailable during the tax year (for example, because of a mechanical fault)
- Your car’s BiK rate – which is calculated based on the car’s CO2 emissions
- The type of fuel your car uses: petrol, electric, diesel or hybrid (even electric cars are not exempt from company car tax)
- Your income tax bracket
- An extra surcharge of 4% on diesel cars diesel cars brought in by Philip Hammond on 7 April 2018 in the 2017 Autumn Budget
Here’s how you do it:
First, multiply your company car tax band rate(as shown in the table below) by your car’s P11D value. This gives you yourBiK.
Next, multiply that figure by your marginal tax rate: either 20% or 40%. This gives you your yearly company car tax payment.
A few things to bear in mind: if your car’sCO2 emissions fall between the bands, you can round the number down to get the company car tax band that applies to you. Here’s how it works: a diesel company car with CO2 emissions of 98 g/km would have a BiK of 27%. That’s 23% plus the 4% diesel surcharge.
Let’s do an example, so you can see how it works
1. Calculate your company car’s P11D value – HMRC has a handy calculator that will help.
Let’s say it came out at £30,000.
2. Multiply this by the company car tax rate based on your car’s CO2 emissions (use the table below). This gives you your BiK amount.
Say you drive a petrol car with 110 g/km emissions – your rate is 26%.
3. Finally, multiply your BiK rate with your personal tax rate.
The average is 20%.
In this example the equation looks like this:
£30,000 x 0.26 (this represents the percentage) = £7,800 (the BiK amount)
£7,800 x 0.20 (again representing the percentage) = £1,560 due for 2019-2020
Company car tax rates for 2019-20
BiK rates for 2019-2020
There are currently 21 company car BiK tax bands for 2019-2020, which are based on a car’s emissions.
Extra info on diesel cars…
As previously mentioned, there is a diesel supplement of 4% to pay, which applies if your diesel car:
- Was registered between 1 January 1998 and 31 August 2017
- Registered on or after 1 September 2017 but isn’t RDE2-certified (RDE2 is Real Driving Emissions 2. This tests for the nitrogen oxide emitted by a car. The standard is 0.080 g/km. It is tested in a standardised lab test called the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).
This diesel supplement doesn’t apply to hybrids, and you don’t have to pay if your car emits less than 0.08 g/km of nitrogen oxide.
What about company car tax for electric and hybrid cars?
While fully electric cars are Vehicle Excise Duty-exempt, you still have to pay BiK tax if you have an electric or hybrid car as a company car.
The rate is much lower because the government is trying to encourage people to buy clean cars. However, it has also risen 3% for the coming financial year. It’s going from 13% for 2018-2019 to 16% for company car tax year 2019-2020.
BiK rates for electric and hybrid cars are calculated according to how far they can drive without producing any CO2 emissions. This is known as their zero-emission range. It is calculated in miles.
But that said, there’s good news on the horizon for electric-company-car drivers. In April last year, the Government said it would cut BiK rates for zero-emissions vehicles down to 2% in 2020 to encourage their use as company cars.
Are there any other car tax-related costs?
There is also a car fuel benefit, which is charged to an employee or company director receiving free fuel for private use. Private use covers employee trips from home to work and vice versa, unless traveling to a temporary place of work. The fuel itself is free but you have to pay tax on it as it is also classed as a BiK.
Handily, HMRC has a calculator, which takes away the stress of doing it for yourself. However, you might not have to report/pay fuel tax (including private journeys) if you buy the fuel yourself (employee) or if your employees pay you back for fuel in the course of the year (employer).
Are there any exemptions for company car tax?
There are a few company car tax loopholes. You don’t have to pay company car tax if:
- The car is owned privately by the employee or director
- The vehicle is used only for business trips – going to meetings or a temporary workplace, and not used for private journeys
- Customised for a disabled employee – but only if used when traveling to and from work and for work-related journeys
- It is shared – i.e. a carpool vehicle and kept on the company premises
If you want to keep company car tax payments down, don’t buy diesel: the tax on that isn’t likely to drop, it is more likely to keep rising. So, be mindful when selecting your next company car – it pays to go green if you want to keep your company car tax to a minimum.
