It’s that time again: tax season is fast approaching. We all know that calculating your company car tax can be confusing, and with some upcoming changes this tax season, employers need to do their homework before filing.
Wondering ‘how do company cars work’ and how they impact your tax rates? Read on for a breakdown of the HMRC company car tax rates 2020/21, and how you can save on company car tax.
What Is A Company Car?
A company car is owned or leased by an employer for the use of a single employee. Company cars face Benefit in Kind (BiK) taxation.
It’s easy to confuse company cars with pool cars, but they are taxed differently. Pool cars are business vehicles available to numerous employees and are exempt from BiK.
How Does Company Car Tax Work?
When it comes to taxes, the answer to “how do company cars work” is a combination of factors. There are three types of company car tax – BiK, National Insurance Contribution (NIC), and fuel tax, but this article will focus on BiK.
- The BiK rate is calculated by your CO2 emissions, tax bracket, and car’s value.
Your BiK is based on the P11D value, which is the list price of the vehicle multiplied by the CO2 emission band. Cars registered prior to April 6, 2020, have a different tax rate than cars registered after. And notably, diesel vehicles face a four percent surcharge unless they meet the WLTP emission regulations.
Your company car is exempt from UK company car tax if the vehicle:
- Is available for business journeys only, is privately owned, or is a pool vehicle
- Is adapted for mobility for employees with a disability, as long as the only private use of the vehicle is for commuting between home and work
- Is an emergency vehicle
What Are The HMRC Company Car Tax Rates 2020/21?
The first thing to know is that to curtail the economic impacts of Covid-19, tax rates were temporarily frozen. That means that:
- 2019 published rates remain at 2022/23 rates for an additional 2 years
- Starting in the 2021/22 tax year, company car tax rates will be increasing by one percentage point annually
- In the 2022/23 tax year, the percentages will be back to their published rates in existing legislation
- 2023-2025 tax rates will be kept at the 2022/23 tax rates.
Click here for the tables with current and upcoming BiK band percentages and more details on taxes and how company cars work.
To calculate your HMRC company car tax rates 2020/21, you can use the HMRC calculator or follow this formula:
1. Determine the P11D value by adding the vehicle’s list price and extra costs (excluding road tax or first-year registration fees)
2. Multiply that by the BiK band percentages
3. Multiply that figure by your income tax band, either 20% or 40%
For instance, if your vehicle is £20,000 with a 25% BiK and you fall in the 40% tax bracket, you owe 40% of 25% of its value. 25% x 20,000 = £5,000; 40 percent of £5,000 = £2,000 tax.
→ Greats News For Eco-Friendly Fleets: Pure Electric Vehicles Face No Bik In 2021/21!
In the 2021/22 tax year, electric vehicles will have a BiK rate of one percent, and a rate of 2 percent frozen until at least 2025. Hybrid vehicles also incur much less tax than petrol vehicles, often half.
How To Save On Company Car Tax
→ The #1 Thing You Can Do To Reduce Company Car Tax Is Go Electric
Electric cars are the future, and low HMRC company car tax rates 2020/21 support your transition to an eco-friendly fleet. Electric vehicles not only reduce your company car tax, but they future-proof your fleet. Going green is good for business in so many ways- there has never been a better time to make the switch!
Other things you can do include choosing company cars with a lower price point and minimising vehicle add-ons. Plus, there are plenty of things you can do to offset company car taxes, like installing fleet telematics, reducing mileage, regular vehicle maintenance, and investing in theft prevention.
Salary Sacrifice Scheme
- In some cases, choosing a salary sacrifice scheme over company cars makes the most fiscal sense.
With a salary sacrifice scheme, employees give up a portion of their gross salary for a company-leased car. That means employees save on income tax and avoid paying national insurance (NI) for the amount of money they’ve given up. They simply pay benefit-in-kind (BIK) tax on the car, which works out to less than income tax. And the employer saves money too, through reduced NI contributions and corporation tax: a win-win!
Low CO2, Low Taxes: How Company Cars Work
Understanding how HMRC company car tax rates 2020/21 are calculated is key to reducing your taxes. Temporarily frozen taxation rates will save you money in the short term, but the best long-term strategy is switching to electric. Electric vehicles not only save you company car tax, but they lower your ongoing vehicle expenses and boost your status as a sustainable fleet.