Being offered a company car is a potentially fantastic perk. On the face of it, you get the benefits of new car ownership with few of the costs. No maintenance costs, no insurance costs and, for some, even fuel costs thrown in by your employer.
Unfortunately, it’s not quite as simple as that. If you’re using your company car for anything other than business use, then the government views this as a taxable benefit. This is true even if you only use the company car for commuting and for no other private use.
However, there is a great deal of variation in how much tax you have to pay, and a lot depends on which sort of car you choose. Pick the right model and you could end up with a brand-new car on your driveway that will cost you far less in tax than it would to lease or finance the same model privately.
Choose the wrong car, however, and it could cost you hundreds of pounds a month in tax – and possibly leave you with a vehicle that doesn’t really suit your needs.
How Company Car Tax Works – the Basics
Unless you use your company car exclusively for work purposes – and that doesn't include commuting – HMRC defines it as a perk of your job. As a result it’s considered to be a benefit in kind (i.e. remuneration for your job in the form of a benefit rather than money) and so attracts benefit-in-kind (BIK) tax. Much as with income tax or national insurance, this is deducted from your monthly wages on a rolling basis.
How much you pay depends on three things: your income tax bracket, the value of the car and – perhaps most significantly – the level of the car's CO2 emissions. There are some variations and exceptions, but in essence, the more your car costs, and the more carbon dioxide it emits, the more tax you’ll end up paying.
Income Tax
With company car tax, you’re taxed at the same rate as your income tax rate, essentially because HMRC views having a company car as a perk in lieu of part of your salary, so taxes it accordingly.
This means that you’ll be taxed for part of the value of the company car at whatever your income tax bracket is. In England, Wales and Northern Ireland that means 20%, 40% or 45% (at the time of writing, during the 2021/22 tax year). For Scotland, the rates are slightly different – spread between 19% and 46%.
How Much the Car is Worth – P11D Value
Tax issues wouldn’t be tax issues without complicated-sounding jargon. In the case of company car tax, a key one is P11D. This is basically the list price of the car, including any optional extras. However, it differs from the ‘on-the-road’ price of the car, which you would pay as a private buyer, because it excludes the registration fee and the first year of Vehicle Excise Duty (aka road tax).
CO2 Emissions
The CO2 emissions of the car you run is probably the biggest single factor in determining how much tax you’ll pay. Depending on the CO2 emissions, it will sit in a tax bracket that will mean between 1% and a whopping 37% of the car’s P11D value will be taxed. This applies to petrol and diesel cars, as well as regular (non-plug-in) hybrids.
For plug-in hybrid vehicles, the battery electric range of the car is also a consideration, as the higher-range models fit into some of the lowest tax bands. However, you’ll need a full electric car – one with nothing but an electric motor to power it – to qualify for the very lowest company car tax bands.
Adding it all Together
Fortunately, you won’t have to pay tax on the whole value of the car. Instead, you just pay your income tax band rate on the percentage of the car’s P11D value according to which BiK rate it sits in. In simple terms, you have to:
- Work out the amount of the car’s value that’s taxable each year (between 1% and 37%)
- Work out 20%-45% of that, depending on your income tax bracket
- This is what you’ll pay each year. Divide it by 12 and that’s what will come out of your monthly pay packet.
You can find the government's own company car tax calculator on its gov.uk website, plus you can take a look at some specific examples we've put together below.
Company Car Tax Costs – Examples
Let’s look at a couple of specific examples for the 2021/22 tax year, using a popular diesel model, a plug-in hybrid and a battery electric vehicle to show the differences in tax costs between the various engine and fuel types. All figures are from the time of writing in September 2021.
Diesel car: BMW 320d Touring M Sport In many ways this is the classic company car; however, despite its sensible fuel economy, the mid-spec diesel 3 Series is not as tax-efficient as it was under previous tax regulations.
P11D value: £40,940 CO2 emissions: 128g/km Annual road tax cost: £170 BiK rate: 29% BiK tax value: £11,873 Annual BiK tax cost at 20%: £2,375 (£190 per month) Annual tax cost at 40%: £4,749 (£396 per month) Annual tax cost at 45%: £5,343 (£445 per month)
Plug-in hybrid: Volkswagen Golf GTE Because the electric motor and battery pack in this Golf gives it an electric range of more than 40 miles, it's more tax-efficient than the non-electrified BMW 320d.
P11D value: £36,645 CO2 emissions: 25g/km Annual road tax cost: £0 BiK rate: 7% BiK value: £2,565 Annual tax cost at 20%: £513 (£43 per month) Annual tax cost at 40%: £1,026 (£85 per month) Annual tax cost at 45%: £1,154 (£96 per month)
Battery electric vehicle: Nissan Leaf e+ Tekna
The Leaf is one of the most popular electric cars around, and in top-spec Tekna with the larger 62kWh battery of the e+ model, its price is broadly comparable with the other two cars
P11D value: £34,890 CO2 emissions: 0g/km Annual road tax cost: £0 BiK rate: 1% BiK value: £349 Annual tax cost at 20%: £70 (£6 per month) Annual tax cost at 40%: £140 (£12 per month) Annual tax cost at 45%: £157 (£13 per month)
As you can see from the examples above, the amount of tax you’ll end up paying can vary hugely, even on cars that are worth a similar amount.
How to Find a Company Car that’s Tax-Efficient
Electric Company Cars
The most obvious solution is to opt for an electric car, as these all fall into the lowest company car tax bracket, attracting a 1% BiK rate in the 2021/22 tax year and a 2% rate for the 2022/23 tax year. However, for some high-mileage drivers, the limited range of some electric cars, lack of driveway space for a home charger, or the currently-still-patchy public charging network means that an electric vehicle isn’t necessarily the best default option.
PHEVS – Plug-In Hybrid Company Cars
For more flexible motoring, you might find that a plug-in hybrid can save you a bit on company car tax. As long as the vehicle’s CO2 rating is under 50g/km it should attract no more than a 14% BiK rate and in theory as little as 2%. However, in reality few can better around 55 miles of all-electric driving, so a 7% or 8% tax rate is more likely.
Other Hybrids, Petrol and Diesel Company Cars
Conventional "self-charging" hybrids and petrol or diesel cars with mild hybrid technology don’t benefit from the same low tax rates as plug-in cars, but these models generally offer fairly low CO2 emissions, so tend to be fairly tax-efficient as a result .
Diesel cars are also no longer the tax burden they have been in recent years. From January 2021, all new diesel models conform to an emissions standard called RDE2, which means they avoid the 4% surcharge levied on older diesel models. And since diesels tend to emit less CO2 than equivalent petrol-powered models, an economical diesel car is still a valid option for high-mileage company car drivers seeking to maximise their tax-efficiency.
Types of Company Car to Avoid
Since CO2 emissions and fuel-efficiency are inextricably linked to one another, heavier, less fuel-efficient cars tend to be more expensive. This means that larger SUVs, such as a Land Rover Discovery Sport, can often end up costing more than a conventional family car, like a Ford Focus, or even something large but efficient, such as a diesel Skoda Superb.
Company Car Tax Bands
It’s worth noting that if a car was first registered before 6th April 2020, its CO2 figures may well be a little different, as the way fuel economy and emissions figures were measured changed to the newer, tougher WLTP system, rather than the old NEDC method of measurement.
Using Your Own Car for Business Purposes
You can use your own car for business use, and you can claim expenses back on mileage accrued while on business. This works out at 45p per mile for the first 10,000 miles, and 25p per mile after that.
Remember, though, that you’ll need to cover insurance, maintenance and services yourself, as well as the cost of buying or financing the car in the first place. You’ll also need to ensure that your insurance policy is set up to include business cover. This won’t generally affect your premiums hugely, but it’s important to make sure that particular box is ticked.
