By definition, a company car is a vehicle that’s used by a single employee but that is owned or leased by the employer. A company car may be used for both business and personal reasons. However, the mileage must be tracked carefully by the driver for both tax and legal reasons.
Understanding company car tax can be confusing at first. How does company car tax work? How much company car tax will you have to pay? Do self-employed persons have to pay company car tax?
This post will explain how company car tax works and how it affects small businesses versus self-employed persons.
How Does Company Car Tax Work?
Employees with a company car must pay Benefit in Kind (BIK) tax, which is a special type of tax that’s reserved for non-cash company benefits. Company cars are also subject to NIC contributions by the employer.
So, how much tax do you pay on a company car? It will vary based on the following criteria:
- The age of the car
- Fuel type
- CO2 emissions
- The engine size
- The list price of the car
- The employee’s income bracket
If you’d like to pay less company car tax, the only option is to switch to an electric vehicle. The current company car tax on electric vehicles is a mere 1% and will remain so through 2022.
Driving a plug-in hybrid car is another option if you’re looking to pay less on company car tax.
Company Car Tax for Small Businesses
The most important thing for small businesses to remember about company car tax is that it only applies to vehicles that are driven by a single employee.
If a business leases or owns a vehicle that can be driven by multiple employees, it is not considered a company car. Most businesses will deduct BIK tax at source (i.e. directly from the employee’s paycheck).
To calculate an employee’s HMRC company car tax rate, business owners need to take into account the P11D value of the vehicle, the employee’s annual tax income tax rate, the type of fuel used and the vehicle’s CO2 emissions.
Company Car Tax for the Self-Employed
Company car tax only applies to self-employed persons who operate as a Limited Liability Company (LLC). Company car tax doesn’t apply to anyone who operates as a sole trader, because the government doesn’t distinguish between you and your business.
However, sole traders may claim back business miles when submitting their annual income tax forms. To claim back business miles as a sole trader:
- Keep a detailed log of business-related mileage.
- Multiply the mileage by the HMRC’s approved mileage allowance payment.
- Add this figure to your annual income tax forms.
Read More: Learn More About Company Car Tax Rules
Wish Company Car Tax Calculations Were Easier?
If you’re sitting there thinking, “how much company car tax will I pay?” here is the simple answer: you can calculate the exact amount of company car tax you’ll be required to pay using the HMRC company car calculator.
Remember that no matter if you’re an employee or are self-employed, you must keep an accurate log of the business and personal miles driven in your company car. Although mileage can be recorded using a paper log, it’s much easier to track business miles using a car tracker like Fleet Geo.
Fleet Geo by Vimcar has a Private Mode that can be turned on whenever a company car is driven for personal reasons. This means the only miles that will be tracked are business miles.
Read more: how does car allowance work