Company Car Tax Explained

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).

If you're wondering how much company car tax you'll have to pay, Fleet News has a handy calculator.

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.

Benefit-in-kind CO2 bands by tax year 

Ask HJ

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

More Questions

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:

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.