Company Car Tax Efficient Guide

Company car tax rates, example BIK calculations, tax efficient company car top tips

Tax Efficient Company CarsIt can be confusing whether or not to introduce company cars into your business. Equally confusing can be what company car tax employees should then pay on the specific car models. In this article we look at company car taxes from a business perspective and also that of the employee ie. an individual provided a company car for private use (which includes commuting).

For employees considering a company car, jump to the BIK section using the TOC above

There are essentially three main tax efficient areas to consider when making the decision to add company cars to a business: –

  1. Reduce Corporation Tax via Capital Allowances – principally affecting the business
  2. Reduce Value Added Tax (VAT)principally affecting the business
  3. Reduce personal taxation via Benefits In Kind – principally affecting the employee

Tax Efficient Company Cars Top Tips Summary

  • Try to go for the low emission options if possible.
  • Consider the total tax position, you may find that it is more tax efficient to purchase a car privately, hence why many companies offer a car allowance rather than a company car.
  • Compare purchase, hire purchase and contract lease options. If the business doesn’t own the car, as with a contract lease, then capital allowances don’t apply, however, the expense of the lease should be tax deductible.
  • Pool cars don’t attract benefits in kind.

For the purposes of this article we are assuming that your business is a limited company. If you are a sole trader or partnership there may be some differences as to the tax treatment to the cars used by the business owners.

Capital Allowances Considerations

For employees; you cannot claim capital allowances for cars, bicycles or motorbikes which you use for work purposes. However you may be able to claim for fuel costs and business mileage.

For businesses; Capital allowances can be claimed on cars you purchase and use in your business. This means part of the value of the car can be deducted from your business’ profits before paying tax. You can use ‘writing down allowances’ to work out what you can claim. Note that cars do not qualify for Annual Investment Allowance (AIA), however, sometimes there can be 100% available for very low emission cars or battery cars but check if it is still available and applicable before purchasing.

What counts

For capital allowances a car is a type of vehicle that:

  • is suitable for private use, including motorhomes
  • most people use privately
  • wasn’t built for transporting goods

What doesn’t count

Because they don’t count as cars you can claim AIA on:

  • motorcycles – apart from those bought before 6 April 2009
  • lorries, vans and trucks

Rates for cars

The rate you can claim depends on the CO2 emissions of your car and the date you bought it. If you’re claiming writing down allowances, group items into pools depending on which rate they qualify for. The 3 types of pool are the:

  • main pool with a rate of 18%
  • special rate pool with a rate of 8%
  • single asset pools with a rate of 18% or 8% depending on the item

You can add items you’ve claimed as ‘annual investment allowance (AIA)’ or ‘first year allowances’ into the pool they qualify for. The value you add for them is zero. For first year allowances you don’t pool them until the year after you claim for them.

The main and special rates apply from 1 April for limited companies, and 6 April for sole traders and partners. The first year allowances rate applies from 1 April for all businesses.

Cars bought from April 2015 What you can claim
New and unused, CO2 emissions are 75g/km or less (or car is electric) First year allowances
New and unused, CO2 emissions are between 75g/km and 130g/km Main rate allowances
Second hand, CO2 emissions are 130g/km or less (or car is electric) Main rate allowances
New or second hand, CO2 emissions are above 130g/km Special rate allowances
Cars bought between April 2013 and April 2015 What you can claim
New and unused, CO2 emissions are 95g/km or less (or car is electric) First year allowances
New and unused, CO2 emissions are between 95g/km and 130g/km Main rate allowances
Second hand, CO2 emissions are 130g/km or less (or car is electric) Main rate allowances
New or second hand, CO2 emissions are above 130g/km Special rate allowances
Cars bought between April 2009 and April 2013 What you can claim
New and unused, CO2 emissions are 110g/km or less (or car is electric) First year allowances
New and unused, CO2 emissions are between 110g/km and 160g/km Main rate allowances
Second hand, CO2 emissions are 160g/km or less (or car is electric) Main rate allowances
New or second hand, CO2 emissions above 160g/km Special rate allowances

You can move the balance of any cars bought before April 2009 to your main rate allowances pool.

If your car doesn’t have an emissions figure use the special rate – use the main rate if it was registered before 1 March 2001.

Using cars outside your business

If you’re a sole trader or partner and you also use your car outside your business, calculate how much you can claim based on the amount of business use.

If your business provides a car for an employee or director you can claim capital allowances on the full cost. You may need to report it as a benefit if they use it personally.

VAT Considerations

For businesses; do not assume that you can reclaim 100% of the VAT paid when purchasing a new car. However, if you use the vehicle for a taxi, self-drive hire or driving instruction you can usually claim 100%, as the rule is that the vehicle must be 100% for business purposes therefore, a pool car can often qualify.

If the car is a lease car, 50% of the VAT can usually be reclaimed.

Ensure that you consult with your accountant or tax advisor to assess how much VAT you can reclaim.

Benefits in Kind (BIK) Considerations

For employees; If your employer provides you with a company car it is considered as a Benefit In Kind (BIK) which you receive on top of your salary – and as such subject to tax (both personal Income Tax and Class 1a National Insurance for the business).

BIK is charged at a rate from 5% to 37% of the list price of the vehicle, depending on it’s CO2 output – see chart below. Therefore you may find that an expensive company car with high emissions may not be so attractive. Also note, that the BIK is calculated on the list price, so purchasing second-hand company cars may not be suitable.

Company car tax bands are not to be confused with Vehicle Excise Duty (VED) car tax bands, or ‘road tax’.

The company car tax rate is broadly determined by its carbon dioxide (CO2) emissions, categories into bands and a corresponding percentage applied to the car’s P11D value. The P11D value of the car includes its Recommended Retail Price (RRP), VAT and any optional extras such as sat nav, cruise control, parking sensors etc. However, this does not include non-taxable items such as the original registration fee and 1st year’s road tax. The P11D value can be reduced if you pay something upfront towards the cost of the car or you only have the car part-time.

The following are also taken into account:

  • capital contributions by the employee to the cost of the car or accessories
  • for years to 2010/11 only, the price (net of capital contributions) is subject to a maximum; no limit is applied from 2011/12 onwards
  • periods when the car is unavailable
  • payments by the employee for private use of the car
  • if the car is a classic car some rules are modified
  • periods when the car is shared

The benefit is calculated afresh for each tax year because any of the constituents taken into account in the calculation can change.

Company car tax bands 2015/2016 tax year

Form the chart above it can be seen that diesel fuel cars currently have a 3% surcharge compared to petrol models with similar emissions. This is because they emit greater amounts of harmful particulates. So to make up for the initial higher cost of a diesel powered car you will need to be doing a lot more miles per year than a petrol equivalent.

How much company car tax do I need to pay as an employee?

The total amount of company car tax you actually pay is ultimately dependent on the income tax rate for your annual salary.

So for example a 20% income tax payers would pay 20% of the taxable portion (BIK) of the car’s P11D value, typically deducted direct from your monthly salary.

Car BIK = { the cars P11D value } x { the cars CO2 associated car tax rate percentage }

Therefore, the amount you actually pay would be:

Amount company car tax per year = { car BIK } x { your salary tax bracket percentage }

Company Car Tax Example Calculation

Below is a basic example of how to calculate the company car tax for an employee:

  • Car P11D value: £25,000
  • Car CO2 output: 150 g/km
  • Car tax band: 25% (based on CO2 output)
  • Personal Tax Rate: 40%
  • Total company car tax = £25,000 x 25% x 40% = £2,500 per year (or £208.33 per month)

Then of course you have on top cost of ownership items such as road tax, fuel, insurance, servicing costs which all should be factored in.

Further Reading

For a VERY indepth approach, HMRC have published a complete step by step guide: HMRC car benefit calculation guide. Otherwise you can check out our Car and Fuel Benefits Calculator, or the examples provided below.

Car and Fuel Benefits Calculator

Looking for a Car and Fuel Benefits Calculator?

To see how much BIK you would pay on a specific car, check out our Tax & Business Centre. The calculator can be found under: Resources » Tax Centre » Tax Calculators
Car and Fuel Benefits Calculator

The Office for Low Emission Vehicles has also released a PDF document you can download from our site which you may find useful: FACTSHEET – Tax implications of ultra low emission vehicles

Company Car Examples

Auto Express have a pretty good guide on the best company cars for 2015 in various price brackets – so if you are looking for specific recommendations then it’s worth checking out. Otherwise you can find some examples below that we put together back in 2012, when this article was originally written.

Lexus CT200h (2012 figures)

Efficient Car Examples

  • A 40% Taxpayer will pay under £80.00 per month for an SE-I model (excluding metallic paint)
  • 10% Employee Benefit in Kind
  • 100% First Year Write Down Allowance/Tax Relief equating to £6,184 (based on 26% Corporation Tax)
  • Offset Contract Hire Rentals against Corporation Tax
  • Fuel consumption combined of 68.9mpg (tested under European standard conditions)
  • CO2 Emissions 94g/km
  • Congestion Charge Exempt
  • £0 Road Tax

Other company car examples (2012 figures)

Car CO2/km Employee BIK rate 2012/13 Employee 3 year BIK 40% tax payer 3,000 miles private fuel cost pa* Total Cost
Lexus CT200h SE-I 94 10% £2,943 £856 £3,799
Volvo C30 DRIVE 1.6 diesel SE Manual 99 13% £3,434 £812 £4,245
Mercedes A160 CDI Blue EFFICIENCY Classic SE 118 17% £3,687 £960 £4,647
Alfa Romeo Giuletta 1.6 JTDm-2 Lusso 114 16% £4,159 £939 £5,098
BMW 118d SE Auto 119 17% £5,068 £960 £6,029
Audi A3 2.0 TDI SE140 S’tronic 129 19% £5,494 £1,047 £6,540

*Calculations based on the following fuel prices: diesel £1.38, petrol £1.35 in 2012, 7.5% increase in 2013, 5% in 2014. Data sources: direct.gov, Thacham.

Do you require additional Company Car guidance?

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Information Sources

  • 2015/16 Capital allowances for business cars – GOV.UK
  • 2015/16 Company car tax bands – Vehicle Certification Agency
  • Lexus and comparison metrics – Andrew Moss, Lexus Twickenham Corporate Sales
2016-10-23T10:22:02+00:00 June 3rd, 2012|Tax|23 Comments

About the Author:

Nicky Larkin
Nicky Goringe Larkin is a Chartered Management Accountant who founded Goringe Accountants Ltd. - British Accountancy Awards 2013 Runners Up and awarded 'Highly Commended' accolade. Nicky is also Chair of the regional Federation of Small Businesses (FSB) as she is passionate about ensuring that Small Business issues are heard at the local and national level.
  • GAlly

    Very interesting article. Even if generaly speaking cars are cleaner than before, some accessories such as autoradios, lights etc… still generating pollution of few kinds.

  • john o’rourke

    What is the capital allowance position if the business purchases a Lexus CT 200H (CO2 EMMISSIONS OF 94) second hand?
    Does it still get the 100% allowance in the 1st year or does it fall into the general pool?
    Thanks

    • Unfortunately the 100% car allowance for low emission vehicles is only available for new cars. A second hand low emission car would fall into the general pool category and currently receive 18% writing down allowances.

  • Unfortunately the 100% car allowance for low emission vehicles is only available for new cars. A second hand low emission car would fall into the general pool category and currently receive 18% writing down allowances.

  • Dylan Morgan

    Nicky, i have just got a company car from my limited company which attracts a benefit in kind charge of £7784 and a taxable annual charge at the 20% rate of £1556. So far so good. I am then being led to believe that the £7784 effectively becomes part of my personal income stack up to the higher rate of around £41k thus drastically reducing the amount of dividend i can take out of the business as a director benefiting from the tax rules up to £41k. I thought that company cars were a P11d benefit, i would be taxed at £1556 (with the limited company paying NICs) and that the BIK wouldnt be seen as additional income.

    • Hi Dylan.

      The benefit in kind from having a company car is included in your taxable income. Therefore it is correct that is impacting the level of your dividends falling into the higher rate bracket. Some director’s take a company car instead of a small salary so that the car still falls into the personal allowance, and then just take dividends on top. If you have a director/employment contract you may not be able to change your salary level, however, if you don’t you may consider changing your salary/dividend mix.

    • Hi Dylan.

      The benefit in kind from having a company car is included in your taxable income. Therefore it is correct that is impacting the level of your dividends falling into the higher rate bracket. Some director’s take a company car instead of a small salary so that the car still falls into the personal allowance, and then just take dividends on top. If you have a director/employment contract you may not be able to change your salary level, however, if you don’t you may consider changing your salary/dividend mix.

  • Salman Qayyum

    Thanks for your article i am not able to understand…..let says i bought Lexus CT200h SE-I on a lease of 300 pound a month through my company as i am self employeed. How much i can take back or claim end of the year?

    or let says i buy this car in a full price for 20,000 then how much i can claim back or what is BIK for that. Please explain thanks

    • Provided the car is still in the low emissions classification then 100% capital allowances for the purchase can be claimed if you have bought it or if you have signed a finance lease. Therefore if you are at the 20% corporation tax rate a £20k car could potentially save you £4k on your corporation tax bill. The emission rate is changing each year so please check here http://www.hmrc.gov.uk/cars/rule-changes.htm

      If you lease a car via an operating lease, the lease cost will be expensed so you will receive a corporation tax benefit but spread over the period of the lease.

      The BIK rates have also recently changed, the latest percentages can be seen on this website by going to News & Resources – Tax Centre – Car and Fuel Benefits.

  • Jennifer Wilkinson

    Hi, my dad owns a ltd company and is considering purchasing a vehicle for me that costs approximateky 35k, has 124 co2 and 20% BIK. The vehicle will be for personal use and he is in the 40% tax bracket. Could you please explain what benefits he would get buying the vehicle through his company rather than just outright personally?

    • Apologies for the delay in reply. The decision may depend on your personal tax rate. If he takes money out of the business to buy a car he will be subject to the higher rate tax rate as per your post, however, if you are in 20% bracket then the overall cost may be cheaper by purchasing it via the company. However, the purchase must pass the wholly/exclusively for the purpose of the business. i.e. you should have some sort of role in the business which would necessitate you being awarded a company car.

  • BC

    TRYING TO FIND A WEBSITE THAT HELPS….???? should I TAKE CO.CAR – Audi A4 2.0 TDIe SE 4dr – SEAMS TO BE 4 YEAR LEASE PERIOD or £5,300 allowance a year (fixed for 3 years)?.

    • There are many factors that will enter into your decision.

      1. What car would you use if you took the allowance?
      2. Which tax bracket are you in?
      3. Would you prefer to get a much cheaper car and pocket the cash?

  • Vipul

    Hi
    I am planning to buy a new zero emmissions car that will cost £60k in March next year. I am a director of a Ltd company and am thinking of buying it within the company and then paying BIK to use the car pivately.
    Does the Capital allowance of 100% mean my company can write down the full cost of the car against profits – so £60k?
    Thanks in advance if anyone in the know responds

    • Subject to you not using up your full AIA already then yes. Please make sure you run this purchase past your accountant first to ensure that you have sufficient allowances available and that the car is suitable for a company car.

  • Steve

    Does a 100% fya on a low emissions car have to be taken in full in the first year or, if beneficial, could it be split over a couple of years eg say 60% year 1 and the balance 40% year 2?

    • No you either take the 100% FYA or the WDA
      (writing down allowance). However, if you are operating as a limited company
      there shouldn’t be a disincentive for taking the full 100% in year one, as you
      can take forward tax losses.

  • Tafster

    Hi Nicky
    I am a company director on salary of £16k per annum, and for this tax year paid myself £80K in dividends, what bracket would I pay 20% or 40% for BIK for a car?

    • The benefit in kind will be at 20%, however, this will push more of your dividends into the higher rate bracket. Also need to consider if you will be over £100k, when you will start to lose your personal allowance.

  • John

    hi if we are given a second hand(two years old) company car should we still pay the full P11D price as isnt this price the price at new? should we not be charged the list price for a car of that age and condition?
    regards John

    • Yes the calculation of the benefit in kind is always a percentage of the original list price plus any additions at purchase.

  • Michael

    Hi, is there a limit to the age a company car can be?