Rules concerning company car taxation are complicated and can be difficult to understand. Company Directors and employees earning more than £8,500 per year must pay tax on their personal usage of company vehicles by way of Benefit In Kind (BIK) taxation. Employers also have to pay National Insurance Contributions (NIC) on BIK tax.
So how is BIK tax calculated?
The BIK calculation depends on two factors. The first is the P11D value of the vehicle concerned. The P11D value is the list price the day before the vehicle was registered including delivery costs and any extras costing more than £100. The second factor determining the rate of BIK tax is the vehicle’s C02 emissions (rounded down to the nearest band). A petrol fuelled car has a higher CO2 rate than an electric or hybrid powered car and diesel cars are subject to a 3% surcharge until the end of the 2016/17 tax year. Choice of vehicle can make a big difference to the costs faced by both the employee and the employer.
Once you calculate BIK tax you must multiply the figure by the employee’s marginal rate of tax (20%, 40% or 45%).
An illustrated example of company car BIK taxation
BIK is calculated using two steps.
BIK = P11D value of vehicle x C02 emission percentage
BIK x employee’s marginal tax rate = company car tax rate
Therefore if the vehicle has a P11D value of £30,000 and C02 emissions of 150 grams per kilometre, BIK = 25% of £30,000= £7,500.
Let’s say the employee pays income tax at 20% their BIK tax would be 20% of £7,500= £1,500per annum.
Some employers also provide their employees with fuel. If any of this fuel is used for private trips then the employee is also taxed on this. The fuel benefit is based on a fixed figure of £22,100 (2015/16) which is then subject to the same calculations as with the car above. Using the same scenario as above the tax liability for the employee would be £1,105.
A cheaper alternative?
An alternative is for the employee to use their own car. The employee has to fund the cost of the vehicle themselves as well as ongoing maintenance and running costs which may be more than the BIK tax liability. Some employers provide a car allowance to help towards the cost, which is effectively additional salary and employees can claim approved mileage payments towards the cost of business travel.
Before making a decision The Financial Management Centre suggest carrying out due diligence to find a car that meets your requirements and then compare the two options. It is likely that a low emission company car will prove to be the best option in terms of overall tax savings for the employee but also the employer. To learn more about HMRC rules around company car taxation, please click here.
What about a company van?
If you have a company van then it is likely you will pay less tax than if you had a car. Incidental private use such as going to and from work is not classed as private and as a result does not attract tax. However if the van is used privately then there is a flat rate BIK of £3,150 (2015/16) and a standard rate of £594 for private fuel.