When a car is provided by your employer that allows you or a member of your family or household private use, then a tax is charged.
This is often called company car tax, but its proper name is benefit in kind (BIK) tax, and is an area of taxation that covers benefits provided by employers. Since 2002, company car tax has been based on a vehicle’s published CO2 emissions, effectively discouraging drivers from choosing more polluting company cars.
The car’s CO2 emissions as recorded on the V5 document puts it into a percentage band that is applied to the car’s P11D value (list price, VAT and any delivery charges) to calculate a taxable value of the car.
The taxable value is then added to an employee’s salary and tax is paid according to his or her rate of income tax.
CO2 emissions are rounded down if not already a multiple of five, while diesel cars attract an additional 3% supplement. However, diesel hybrids do not carry the 3% supplement, and continuing efforts by car manufacturers to make diesels cleaner, as well as lobbying by manufacturers will see the end of the 3% diesel supplement on all new diesel company cars in 2016/17.
Since the CO2-based system was introduced, the tax bands have tightened in most subsequent years.
It means someone choosing a car with CO2 emissions of 120g/km would see the percentage rate used for the taxable value of the car increase each year (see table).
Electric cars are currently exempt from BIK tax, but an announcement in the 2012 Budget will see all plug-in vehicles paying BIK tax from 2015/16.
Benefit-in-kind CO2 bands by tax year
BIK tax band*
*Add 3% for diesels up to a maximum of 35% in 2014/15. Add 3% for diesels up to a maximum of 37% in 2015/16.