How does Company Car tax work?

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A company car is taxed in a specific way, and can prove very expensive! In this post we’ll look at how that tax is calculated and reported so you can make an informed decision about whether you want to accept a company car, or, if you are the owner of a limited company, whether you want to put your car through your company.

As ever if you have any specific questions, please get in touch. The tax rates on company cars is an area that is changing very quickly so we’d advise that you check the current rules and rates as you make your decision.

As a Director of a Limited Company you are classed as an employee, so the details below are applicable whether you are provided with a company car by an employer, or decide to provide one for yourself.

The taxes that you will pay on the company car are Class 1A National Insurance and Benefit in Kind Tax, and the amount of that benefit is reported on a P11D form each year. This form will be prepared as an extension of the payroll process, and you should receive that by 5th July each year.

You will be taxed on a level of benefit calculated on the vehicle which will depend on a number of measures, as follows:

  1. The original list price of the vehicle plus any optional extras.
    • This is not necessarily the price you pay for the car, but the amount before any negotiated discount. Your supplier will provide you with this information.
    • Because the calculation starts with the original list price it’s very unlikely that a second-hand car will be worth purchasing as a company car; the tax becomes much higher when compared to the cost of the car.
  2. The list price is then multiplied by a percentage that will depend on:
    • Whether the vehicle is fully electric.
    • The ‘electric only’ range a plug-in hybrid car has if its emissions are between 1 and 50g of CO2 per Km.
    • The CO2 emissions of the vehicle and whether the fuel used is petrol or diesel. If it is diesel the percentage is higher than petrol to account for the extra particulate emissions.

What happens if you change to or away from a Company Car during the Tax Year?

You are only charged for the company car while you actually have access to it.

For example, if you hand back a company car during a tax year, you aren’t charged on the period after you stop. Similarly, if you don’t have access to your company car for a period of longer than 30 days in a tax year (for example a long illness or accident repairs), you are not charged for that period. You should use a form P46 (Car) to let HMRC know of any changes to the access to a vehicle or if that vehicle changes.

There are deadline that apply for any changes to be notified to HMRC, as follows:

When the change takes placeDeadline to notify HMRC
6 January to 5 April5 April (electronic form)
6 January to 5 April3 May (printed form)
6 April to 5 July2 August
6 July to 5 October2 November
6 October to 5 January2 February

Is there any way to reduce the Tax on a particular car?

Yes! You can make a one-off contribution to the purchase of a company car. This is known as a ‘capital contribution’ and reduces the overall tax charge. It only applies to the initial purchase of the car.

If you decide to contribute monthly to say, get a better car these amounts do not reduce the charge.

Does Private Mileage make any difference?

If your employer agrees to pay for your fuel for private journeys, not just the business journeys, there is an additional tax charge of a flat rate amount (£23,400) multiplied by the appropriate percentage found in 2 above.

Do the same rules apply for a company van?

No – there are different rules for vans and commercial vehicles, but you need to double check the definition of the two!

HMRC define a van as a vehicle that is primarily designed for carrying a load rather than people. A car is a vehicle designed with a primary purpose of transporting people and their luggage.

There are some grey areas though, so always double check with your supplier how the vehicle you are considering will be classified.

The confusion often arises where pick-ups and ‘double-cabs’ are concerned. You can usually assume that if there are windows or seats behind the driver, the payload is less that 1000kgs or the load area is smaller than the passenger cabin, the vehicle will be deemed to be a car.

Once you have confirmed that your vehicle is definitely a van, the Van Benefit Charge will apply. This is an annual, fixed benefit in kind tax, that is not influenced by CO2 emissions.

More information…

There is an HMRC Company Car Tax Calculator online here and you can check the fuel consumption, CO2 emissions and tax bands for new and use cars here.

If you’re unsure of the best option for funding a vehicle for use in your business, please get in touch. As mentioned above, Company Car tax is changing rapidly, so we’d strongly recommend talking through your up to date options before making what may prove to be an expensive decision!

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