Company cars are lucrative job perks that benefit both the company and employee. While they can save money overall, they do make matters a bit more complicated when it comes to reporting your taxes. If your business offers employees the use of company cars, it’s important to know what this means during tax season.
Company car tax rates depend on if the vehicle is a car, a van, or electric, and both the companies and drivers of company cars are expected to pay taxes.
Confused about how tax on company cars works? This article breaks it down for you so you can easily calculate what you owe HMRC.
What Is A Company Car?
While it might seem like an obvious question, there are different classifications for company cars. Get started with answering how does tax on company cars work and avoid HMRC penalties by ensuring you are classifying your company car correctly:
- A company car is owned or leased by an employer for the use of a single employee. That employee can use the car for personal or business purposes.
- A pool car is available for use to numerous employees for business-related needs. Companies are not required to pay company car tax on pool cars.
- A grey fleet is the use of employees’ personal vehicles for business purposes. Typically, the vehicles were bought with company-sponsored ownership schemes, and drivers claim cash-back allowances or fuel expenses.
→ Company vans and light commercial vehicles are categorised into one classification when calculating company car tax.
How Tax on Company Cars Works
There are three types of company car tax:
- Benefit in Kind tax (BiK)
- National Insurance Contribution (NIC)
- Fuel tax
Benefit in Kind (BiK)
Benefit in Kind (BiK) tax is for non-cash company benefits and perks like company cars and petrol.
Drivers who use company cars for personal use are required to pay BiK. How much tax they pay on company cars varies depends on:
- The vehicle’s CO2 emissions
- The employee’s income tax band
- List price of the vehicle, cost of delivery, VAT and optional extras
- What type of petrol the vehicle uses
- The level of access the employee has to the vehicle
Get a Beginners Guide to Fleet Taxes:
National Insurance Contribution (NIC)
Employers offering their staff company cars are required to pay National Insurance Contribution (NIC) payments. How much tax they pay on company cars is decided by the vehicle’s value, BiK rate, and an annual percentage determined by the HMRC.
Typically, companies reimburse employees’ petrol costs for business trips. The HMRC makes it easy for employers to calculate a fair amount: every quarter, the government releases new advisory fuel rates that suggest how much employers should pay for fuel.
- If your company also reimburses employees for petrol on personal trips, employees are required to pay tax on that mileage.
How Do Companies Calculate Company Car Tax?
For companies, how much tax you pay on company cars depends on the P11D value.
The P11D value, or taxable value, is the list price of the vehicle multiplied by the CO2 emission band.
The simplest way to figure this out is to use the HMRC calculator.
→ Companies are required to complete the P11D form annually to calculate and declare their company car taxes
Companies should also complete a P11D(b) form which tells HMRC how much Class 1A National Insurance they need to pay for company perks or reimbursements offered.
Wondering which BIK rate you should pay? Download our CO2 and BIK rate guide:
CO2 & BIK Guide: how does tax on company cars work
How Do Drivers Calculate Company Car Tax?
To calculate how much tax you pay on company cars as a driver, follow these steps:
- Determine the P11D value by adding the vehicle’s list price and extra costs (excluding road tax or first-year registration fees)
- Multiply that by the CO2 rates (BiK band percentage)
- Then, multiply that figure by your income tax band (either 20% or 40%)
Any petrol reimbursed for personal trips by your employer must be reported separately.
Read more: Company car allowance tax
Learn More About How Tax on Company Cars Works
Calculating company car taxes can certainly be daunting. The key thing to remember is that both employers and employees have tax obligations that depend on the P11D value.
Accurately recording business and personal mileage is key because employees reimbursed for non-business-related petrol owe additional tax. Installing fleet telematics can make your life easier and help you track your mileage for accurate reporting to HMRC. Plus, fleet telematics can actually help you offset high fleet taxes!
For more information on how tax on company cars works, head to Vimcar’s tax hub page, and download our full guide to company car tax today