How does company car tax work?
A company car is a great perk but it's important to understand how it's taxed – here's a whistle-stop tour
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Getting the go-ahead from your boss for a company car is exciting.
However, the potential tax implications are rather less so, as choosing the wrong vehicle can prove very costly.
Getting a company car
Under His Majesty’s Revenue and Customs (HMRC) rules, once you get a company car and can use it for private usage – even commuting – the car is taxed as a benefit-in-kind (BiK).
The good news? While your salary might be fixed, some company cars are taxed less than others (depending on things like their emissions), so you can choose what's best for you.
How company car tax is calculated
How much company car tax you’ll pay depends on your salary, your personal marginal tax rate, how much the car costs and the company car tax band it is in, based on the volume of carbon dioxide (CO2) emissions.
Put simply, the lower your income tax rate, the lower the car’s purchase price, and the lower its emissions, the less it'll cost you.
How do I calculate company car tax?
To figure out what you'll have to pay in tax, you need the 'list price' of your company car. This is the total price of the car, including delivery, VAT, and optional extras – minus road tax or first-year registration fees.
Once you have this number, multiply it by its BiK tax band percentage, which is determined by its CO2 emissions.
Getting a bit much? Yes, it gets complicated quickly, but don’t worry – there are a number of handy online company car tax calculators that'll do the sums for you. As you would expect, HMRC has a tool to help you.
Should I opt for the car allowance instead?
You may be given the option of a car allowance instead of a company car, which is paid to you through PAYE.
This means that each month, you're given a set amount towards your personal motoring costs.
Unfortunately, what's best for your finances isn't always clear-cut and largely depends on your circumstances.
On the one hand, a company car is likely to be renewed every few years, and you won't be expected to pay for insurance, maintenance or repairs.
On the other, if you choose a car allowance, you have more flexibility on the make and model that you buy, whether you opt for a new or a used vehicle, and you could have the option of owning the car outright.
Calculating the benefit-in-kind tax for a car
First, find out what car tax band your car sits in.
How much you'll actually pay is this figure multiplied by your income tax band of 20%, 40% or 45% for residents of England and Wales. Or multiplied by 19%, 20%, 21%, 42% or 47% for residents of Scotland.
To further complicate things, BiK bands change most financial years. However, they’re set to stay the same for 2023/24 and 2024/25.
What’s more, the type of fuel your car burns also affects the company car tax you must pay.
Diesel cars, for instance, all face a BiK rate 4% higher than a petrol engine.
Though a high-mileage driver will usually recover the difference in terms of better fuel economy, for a low-mileage driver, the petrol car may be the cheaper option.