Company Car Tax Explained

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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 saw all plug-in vehicles paying BIK tax from 2015/16.

Company Car Tax Calculator

Benefit-in-kind CO2 bands by tax year

BIK tax band*	2014/15 g/km	2015/16 g/km	2016/17 g/km	2017/18 g/km	2018/19 g/km
0	0	n/a	n/a	n/a	n/a
5	1-75	0-75	n/a	n/a	n/a
7	n/a	n/a	0-50	n/a	n/a
9	n/a	51-75	n/a	0-50	n/a
10	n/a	n/a	n/a	n/a	n/a
11	76-94	n/a	51-75	n/a	n/a
12	95-99	n/a	n/a	n/a	n/a
13	100-104	76-94	n/a	51-75	0-50
14	105-109	95-99	n/a	n/a	n/a
15	110-114	100-104	76-94	n/a	n/a
16	115-119	105-109	95-99	n/a	51-75
17	120-124	110-114	100-104	76-94	n/a
18	125-129	115-119	105-109	95-99	n/a
19	130-134	120-124	110-114	100-104	76-94
20	135-139	125-129	115-119	105-109	95-99
21	140-144	130-134	120-124	110-114	100-104
22	145-149	135-139	125-129	115-119	105-109
23	150-154	140-144	130-134	120-124	110-114
24	155-159	145-149	135-139	125-129	115-119
25	160-164	150-154	140-144	130-134	120-124
26	165-169	155-159	145-149	135-139	125-129
27	170-174	160-164	150-154	140-144	130-134
28	175-179	165-169	155-159	145-149	135-139
29	180-184	170-174	160-164	150-154	140-144
30	185-189	175-179	165-169	155-159	145-149
31	190-194	180-184	170-174	160-164	150-154
32	195-199	185-189	175-179	165-169	155-159
33	200-204	190-194	180-184	170-174	160-164
34	205-209	195-199	185-189	175-179	165-169
35	210-214	200-204	190-194	180-184	170-174
36	n/a	205-209	195-199	185-189	175-179

Ask HJ

I have received a large bill for damage at the end of a lease - where do I stand?

I have received a bill for £600 for damage found on a returned lease car returned after 42 months. Some of the damage stated on the invoice does not appear on the collection report, nor the condition report prepared by BCA prior to auction. I know the car has already been sold at auction, for a price which is £1000 higher than the estimate that price guides have for a car of average condition. None of the damage reported on the collection report was repaired prior to sale. Is the finance company permitted to charge me for repairs not carried out?

No. Demand an invoice from whoever repaired the damage on behalf of the finance company. As you write, if they did not have the damage repaired, if it was not itemised on the BCA condition report, and if the car achieved a high price at auction there is no justification for the charge and if the case went to Small Claims the judge would probably throw it out and penalise the leasing company.

Answered by Honest John

If I have an accident in a company car, does it affect my own car insurance?

I have been asked by my employer to drive their company vehicles. If I were to have an accident while driving a company vehicle, would this affect my personal car insurance?

No it would not, but you would need to declare that you had been involved in an incident.

Answered by Tim Kelly

What is the AFR rate?

AFR (advisory fuel rate) payments are the expenses company car drivers can claim for travelling on business in the vehicle provided by employers.

As the vehicle is taxed, insured and maintained by your employer the AFR is only meant to cover the cost of fuel, and is calculated by HMRC with payments graded according to engine size and average fuel consumption.

They are different from AMAP rates (approved mileage allowance payments) which are intended to cover expenses for employees using their own cars on business.

Since June 2011, the AFR is meant to pay within a 15 per cent margin of the mean fuel consumption of typical company cars in a particular engine size range. Previously the calculation had between within 10 per cent.

There are different rates of payment for petrol, diesel and LPG-converted cars.

However, if a driver is allowed to choose their company car it is possible to be overpaid business mileage. Likewise, if a car is driven less efficiently, you can end up subsidising your company’s business mileage costs.

For example, the AFR payments don’t take account of hybrid cars, so a Toyota Prius with a 1.8-litre petrol engine would attract an AFR of 12 pence per mile.

But its official fuel consumption on the combined cycle of 94.1mpg is equivalent to about five pence per mile, showing that if the driver achieves close to the official figure, they can make a profit from the payments.

Some of the ultra-low fuel consumption cars now available, such as Volkswagen Bluemotion and SEAT Ecomotive should enable the AFR to cover fuel expenses.

HMRC reviews review the rates quarterly to ensure they reflected changes in fuel prices more rapidly.

Rates from March 1, 2016:

LPG

1400cc or less 7p

1401cc to 2000cc 8p

Over 2000cc 13p

Diesel

1600cc or less 8p

1601cc to 2000cc 10p

Over 2000cc 11p

Petrol

1400cc or less 10p

1401cc to 2000cc 12p

Over 2000cc 19p

Should my employer pay for my fuel?

Historically one of the ‘perks’ that comes with having a company car has been fully expensed fuel by the employer for both business and private mileage.

But like the provision of a company car for private use, ‘free’ fuel is subject to benefit in kind tax.

Gradually, employers have withdrawn free fuel as a perk although there are some who still offer it, and some drivers who see is as an essential part of their remuneration package.

The tax payable on free fuel is based on a ‘multiplier’ cash sum applied to the rate of income tax you pay, and the BIK tax band of your car, based on its CO2 emissions.

Since April 2011 the so-called Fuel Benefit Charge is based on a ‘multiplier’ of £18,800.

It means a higher rate income tax payer (40%) driving a car in the 25% BIK tax bracket would face a Fuel Benefit Charge of £1,880 per year (25% of £18,800 x 40%).

Likewise, a basic rate income tax payer (20%) driving a car in the 30% BIK tax bracket would incur a fuel benefit charge of £1,128 per year (30% of £18,800 x 20%)

Given that any business mileage is reclaimed, company car drivers should work out that the tax they would end up paying is not greater than the value of the private mileage fuel itself.

You can find that the amount of tax incurred annually would pay for a great deal of free fuel, so many drivers would be better off without it.

As well as paying for the fuel itself, employers are also liable for National Insurance Contributions towards the benefit of free fuel for every employee that claims it, so it isn’t difficult to see why the trend is towards removing the perk.

Should I take cash instead of a company car?

Providing vehicles for staff to use as part of their employment package is a hugely expensive exercise.

It is one of the reasons why many organisations might prefer to pay employees a cash allowance and a business mileage rate than invest in providing cars.

If fleet policies are particularly restrictive, with tight CO2 emissions limits or strict vehicle types, staff might decide taking a cash alternative would give them more freedom to choose a car they would feel more comfortable in, or is more suitable for the type of journeys and use outside of work.

However, this does not mean someone taking cash instead would be entitled to spend the money on any vehicle they want.

Organisation will probably set an annual mileage threshold where they believe provision of a company car is justified and necessary, but for staff who might receive a car more as a perk or part of their remuneration package, cash could be offered as an alternative.

Employers still have a duty of care when staff are driving on business and there is likely to be an agreement to sign with conditions set regarding the type of car used for work.

The vehicle is likely to have a maximum age and mileage, have reached a certain crash safety score in Euro NCAP.

As an employee, you are likely to have to sign up to a commitment to ensure the car is serviced and maintained according to the recommended schedule as well as have your driving licence checked regularly so the employer knows you are qualified and permitted to drive, and carry additional insurance cover for driving on business.

Organisations can choose to pay a business mileage rate for employees own car use at their own discretion.

The government suggests an AMAP (authorized mileage allowance payment) rate of 45 pence per mile for the first 12,000 business miles and 25 pence per mile thereafter.

Although this payment might seem generous compared with how much fuel the car uses, the payment is intended to cover all costs associated with running the vehicle, including road tax, insurance (including any higher premium to ensure the car is covered for business mileage) servicing, maintenance, repair and, where applicable, MOT test.

Some organisations pay higher than the AMAP rate, which can also result in a small profit for the driver if they choose a frugal car, but for any employer that pays less, or nothing at all, the employee can reclaim the balance up to 45p per mile from HMRC.

What is salary sacrifice?

Some employers offer company cars through ‘salary sacrifice’. It means employees, some of whom might not have had access to company cars before, fund a company car through their salary.

Although they are giving up part of their salary to pay for the car, they stand to make significant savings through tax and national insurance contributions because it is funded through the gross salary, before tax.

The benefit to the employer is that the employee funds the car, however, if the employee chooses a low emission car, the benefit-in-kind tax burden could be substantially lower than the tax paid on the salary.

Employees choosing a car under salary sacrifice will most likely be subject to a CO2 emissions cap, purely because salary sacrifice is most cost effective on a car in a low benefit-in-kind tax band.

If you are offered the chance to choose a car under salary sacrifice, it could give you access to a new car at a much-reduced rate compared to buying your own or using a company provided cash allowance.

The downside is the car is provided as part of your employment, so if you were to leave the company, you would have to give up the car.

The attraction for employers is it can attract staff taking a cash allowance into a safety compliant company car scheme, and offer a form of company car without increasing costs significantly.