How does Company Car Tax work?

If you have a company car but also drive it when you're not working, you'll have to pay tax on it. That's because it's a benefit you receive from your employer. And although it isn't a direct monetary benefit, like your salary, it does have an indirect financial benefit.

This is what's known as a 'benefit in kind' (BIK). And HM Revenue and Customs use a calculation to figure out how much you ought to pay for the privilege of having a car to drive outside of work.

The only exemptions from Company Car Tax (CCT) are: if a vehicle has been adapted for an employee with a disability, the employee earns less than £8,500 a year, or the vehicle is a 'pool' car and used by more than one employee.

 

Company car vs. car allowance

If you've been given the option of driving a company car, it's important to weigh up the costs against the benefits. Company Car Tax may make driving a company car not as cost effective as, say, having your employer pay you a car allowance.

It really depends on your individual circumstances as to whether you'd benefit from a company car. For instance, if you expect to do a lot of private mileage, then you may be better off with an allowance rather than a company car.

With an allowance, you'd get to choose whichever car you want. And the contributions from your employer would be taxed at source, just as your salary is. Given the option, you'd have to look at what the allowance covers and what tax you'd have to pay on a company car.

Company Car Tax diagram 

The nuts and bolts of Company Car Tax

Company Car Tax is based on a few different factors. To start with, you need to know the value of the car. This is known as the P111D value. It's essentially the price of the car excluding road tax and the first registration fee.

Next comes the COg/kg emissions figure. Depending on the carbon output of the vehicle, it will fall into a particular band. This is known as the BIK band.

Then, using the combination of price, engine emissions/BIK band and the type of fuel the car takes, you can calculate the amount of Company Car Tax you can expect to pay.

 

Which vehicles make the best company cars?

In 2013, the Government announced two new Company Car Tax bands for vehicles with ultra-low carbon output. These bands cover cars with CO2 emissions between 0-50g/kg – i.e. electric and hybrid cars.

If your company car is electric, you won't have to pay a fuel duty, and your CCT will be much lower. Which is great if your job is relatively local, you have access to charging stations and don't cover huge distances.

However, for those who need a company car with a more powerful engine, greater capacity, or one that can do longer stretches in one go, an electric option is probably out of the question.

In this case you'll need to weigh up the price of the car with its CO2 output. But remember, a cheaper car doesn't necessarily mean lower tax. If its emissions are high, then you'll fall into a higher BIK band and will have to pay more tax to HMRC.

On the other hand, low emissions might not outweigh a heftier price tag. For instance, diesel cars generally have a lower CO2 output, are cheaper to fill, but are more expensive to buy.

 

Use a calculator

The best way to figure out if it's worth having a company car is by using the Company Car and Fuel Benefit Calculator on GOV.UK. Here, you'll be given two tax liability figures – one for the 20% tax bracket and one for 40%. These relate to the income tax bracket you're in. If you're not sure which tax bracket applies to you, visit GOV.UK where you'll find the latest published thresholds.

 

What other services can I use on GOV.UK?

The Government has a new portal you'll need to use when you want to access an online service. It's called GOV.UK Verify. Through it, you'll be able to do things like your Self Assessment tax return, check your State Pension, and check your Income Tax and Company Car Tax.

To use it you'll need to have your identity checked. That's where we come in. We'll get you verified as quickly as possible, so can get on with the other important stuff.

Stay tuned to the CitizenSafe blog for up-to-date information about other government services going live on GOV.UK Verify or in our Tips & Guides

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