Courtesy of AUTOEXPRESS.
One of the big questions that we get asked regularly at B&B Vehicles is “How does Company Car Tax Work?”. Well we though we would share some information posted from AutoExpress (http://www.autoexpress.co.uk/car-news/102480/what-does-p11d-mean-p11d-values-explained) & (http://www.autoexpress.co.uk/car-news/consumer-news/90125/company-car-tax-guide-2018-everything-you-need-to-know), that helps explain a lot of things. We have also now added a company car tax calculator to our website.
Company car tax guide 2018: everything you need to know.
Businesses have offered employees company cars as a benefit and/or tool of the trade for almost as long as internal combustion engines have been on our roads. The main reason being, they are an excellent way to reward staff in a tax efficient manner. Sadly, HMRC aren’t ones for giving out freebies, and the benefit-in-kind company car tax rules were established to make sure that all company car drivers pay their way. Fundamentally, these rules enable HMRC to charge a tax rate which they believe is in line with the gain you get from being given a particular company car.
Occasionally the goal posts are moved and the rules are updated – the 2017 Autumn Budget brought about the most recent set of changes – so when planning your next vehicle, it’s always worth checking a company car tax calculator or benefit-in-kind tax table to make sure there are no unpleasant surprises on the horizon.
Benefit in kind tax bands are not that complicated to understand once you’ve grasped the basics, but again you can use one of the benefit in kind calculators on specialist websites. The rates have been set in recent years based primarily on CO2 emissions, as the government seeks to use company car tax to make the UK car pool greener. However, CO2 is only one element of the equation, and the tax you’ll pay also takes into account the car’s official list price, the cost of any options, and what type of fuel you put in the tank. It even makes a difference how and when the car is purchased, and how much it’s used.
What is company car tax?
If you have use of a car for personal transport, and that car has been supplied by your employer, it will be considered a taxable perk by HMRC.
In official terminology your company car is a ‘Benefit In Kind’ (BIK), because your private use of the car has monetary value. Her Majesty’s Revenue and Customs view that BIK as an addition to your income, because the car is effectively paid for by your employer on top of your annual salary.
As with all earned income, you have to pay tax on it. One of the easiest ways to work out how much, is by visiting the HMRC website and looking at their company car tax calculator and help-sheet sections.
The starting point for working out the tax rate for the car you choose to run is its carbon dioxide (CO2) emissions, as different emission level bands are taxed at different percentages of a vehicle’s value. HMRC calls this the P11D value, and is the HMRC-recognised list price of the car including options added to the vehicle, but without non-taxable items, which include the first year’s road tax and vehicle registration fee.
If the car costs less to buy than the official P11D value, it won’t save you tax, as HMRC still says the BIK value is the same. The BIK value is reduced, though, if you have the car part-time or if you pay something towards its cost in the first place – so your company car tax charge should reduce, too.
It’s important to note that company car tax bands are not the same as normal Vehicle Excise Duty car tax bands. In terms of BIK company car tax bands based on emissions, there are currently thirty different levels, compared to 13 for VED.
How is a car’s company car tax rate determined?
The least polluting company car models, which are electric vehicles, earn a five per cent BIK rate, while the highest polluters are taxed at 35 per cent. As the tax year changes, rates will change, too. So, from April 2016, electric vehicles (EVs) and ultra low-emissions vehicles – which were once exempt – faced a seven or 10 per cent BIK rate.
Diesels currently have a three per cent surcharge over petrol models with similar emissions, because they emit greater amounts of harmful particulates. So if you’re choosing between petrol and diesel for your next company car, you’ll need to work out whether or not you cover enough miles in a year to cover the extra cost of a diesel company car in the first place.
How much company car tax will I pay?
The amount of company car tax you actually pay is dependent on your annual salary. For example, if you fall into the 20 per cent income tax bracket, you’ll pay 20 per cent of the taxable portion of the car’s P11D value. Those in the 40 per cent tax bracket, meanwhile, pay 40 per cent on the taxable chunk of the P11D. This will usually be deducted from your monthly pay packet.
What does P11D mean? P11D values explained.
‘P11D’ and the associated ‘P11D values’ are combinations of letters and numbers which mean very little to a lot of people. If you’re a company car user, however, you will probably have heard the terms being tossed about a fair bit.
The P11D is, rather boringly, a form. Its purpose is to prevent employers and employees from circumventing the UK tax system via benefits in kind – like company cars. Any employer which provides expenses or benefits to employees is required to fill out a P11D (one per employee). The form provides HMRC with the details of any benefits so that the tax and national insurance owed can be calculated.
Even though the employer will be the one submitting the P11D form, the employee will be the one ultimately on the receiving end of the tax bill. That’s where the importance of the P11D to company car users comes in. To keep your tax bill as low as possible, company car drivers will need to choose a car with an low P11D value and a low company car tax band.
P11D value is not an official term but it is used colloquially to mean the value of a company car in the eyes of HMRC. The P11D value is the list price of a car including VAT and any delivery charges but it does not include the first registration fee or road tax. Any factory options fitted to the car will be included in the list price and, therefore, the P11D value.
Once you have the company car’s P11D value, you can work out your annual company car tax by multiplying it by the percentage rate of your income tax bracket (either 20% or 40%) and the car’s benefit-in-kind tax band, which is based on its CO2 emissions on models registered since 1 January 1998.
P11D of used and classic cars
The same P11D value calculation applies to both new and used cars so if you were considering running a used company car, the P11D value and the tax you incur will still be based on the list price when it was new. If there is no list price available to reference, a notional price is used. This is a reasonable value that the manufacturer, importer or distributor would have been expected to have sold the car for.
For the purposes of the P11D, the UK Government defines a classic car as one that is 15 years old or older at the end of the current tax year, and has a market value greater than its original list price. Company car tax is then calculated via three tax bands based on engine size.
- 0 to 1,400cc – 15%
• 1,401 to 2,000cc – 22%
• Over 2,000cc – 32%
If the car’s market value is over £15,000 the percentage is applied to that figure. If the market value is under £15,000 the percentage is applied to the list price of the car when it was new.
Company car tax calculator example.
Here’s how to calculate your company car tax in three simple steps –
1) Take your company car’s P11D value (for example £15,000)
2) Multiply this value by the car’s company car tax rate which is dependent on CO2 emissions (for example 15%) to get your BIK amount
3) Multiply this BIK value by your personal tax rate – 20%, 40% or 50% – (for example 20%). This will be the amount of company car tax payable.
£15,000 x 15% = £2,250 (BIK amount) x 20% = £450 per year
If all the terms and jargon associated with company car tax are a bit confusing, we’ve put together a quick glossary to help you understand all the important bits…
- Benefit in Kind (BIK)– Benefits that are not included in an individual’s salary, one of which is the company car
- Her Majesty’s Revenue & Customs (HMRC)– The UK’s tax authority
- P11D– form that must be completed by an employer every year and sent to HMRC
- P11D value– Total value of the car including RRP, VAT and any extras such as metallic paint, sat nav or parking sensors.
- Recommended Retail Price (RRP)– This is the amount that the car manufacturer recommends that the car should be sold for.
- Vehicle Excise Duty (VED)– amount payable on all cars, including company cars, that is calculated based on CO2 emissions of the car
Company car tax bands 2017/2018:
|CO2 (g/km)||2017/18 BIK rate (%) – Petrol||2017/18 BIK rate (%) – Diesel|