Tax Rules on Company Cars

Make sure you comply with tax rules. Save time and money with our quick guide to company car tax rules.
company car tax rules

With ever-changing regulations, many fleet managers feel lost at sea trying to keep up with tax rules on company cars. However, understanding how HMRC calculates tax rates is key to minimising your company car taxes. Many fleet managers don’t know that by following some simple rules and choosing the right company car, you can save major tax dollars upfront. 

So, what are the tax rules you need to follow as a fleet manager? Here are the top seven guidelines for tax on company cars in the UK:

1. Research P11D Value

Before purchasing a company car, do your homework and consider how it will affect your company tax return. Not all cars are taxed equally! 

Tax is calculated on the total P11D value of your car. This is determined by the vehicle list price and tax band (or CO2 emissions). 

tax savings with company cars
  • This means that vehicles with low CO2 levels and a high list price may be taxed at the same rate as vehicles with high CO2 levels and a low list price.

If you’re unsure, run the numbers through an online calculator to check taxation rates. 

Making Smart Purchasing Choices Up Front May Save You Serious Cash Down The Road

CO2 & BIK Guide: tax rules on company cars

2. Petrol and Tax Rules on Company Cars

The type of petrol your vehicle takes impacts which tax band it fits into. However, it’s not as simple as choosing the one with the lowest tax band. 

For instance, while diesels produce less CO2 and are in a lower tax band than their petrol equivilants, they often have a higher list price upfront. 

Plus, diesel vehicles that do not meet RDE2 standards (Real Driving Emissions test) are subject to a four per cent diesel surcharge on your Benefit in Kind (BiK) taxes. Some car makers are now producing RDE2-compliant cars, so you can have the best of both worlds.

3. Keep Detailed Company Car Records

→ HMRC Expects Employers To Keep Records Of Benefits In Kind For Six Years

That means maintaining meticulous records of your company car journeys. When it comes to tax on company cars in the UK, it’s important to distinguish between business and personal trips.

Installing a fleet telematics system like Vimcar’s Fleet Geo is the simplest, most cost-effective way to track your business and personal trips.

With GPS tracking software you can easily demonstrate proof of journeys to HMRC during a tax audit.

→ Vimcar Has The Market’s Most Accurate Data, And In Seconds, You Can Export Your Vehicle Route History Into An Easy-To-Read And Share Spreadsheet.

4. Account for the Extras

Your P11D value is also affected by the vehicle specs (add-ons). Window tinting, rear-seat entertainment systems, nitrogen-filled tyres, splash guards, and other specs like these all increase the P11D value.

 Some Vehicle Add-Ons Even Increase Emission Levels, Further Increasing The Tax Band

While some of these luxuries may be worth it, going minimal can save you tax dollars later on. If you need more guidance, the vehicle manufacturer should be able to advise you of the P11D value and emissions levels.

 5. Classify Your Vehicle Correctly

Company cars and pool cars are often confused, but in reality they impact your taxes differently.

  • Company cars are owned or leased by an employer for the use of a single employee, and face Benefit in Kind taxation.
  • Pool cars are available for use to numerous employees for business-related needs, and are exempt from tax on company cars in the UK.

However, pool cars do not offer employees the lucrative perks of a personal company car that you may have been seeking in the first place. With pool cars, you need to be strict about no personal vehicle use, including parking them at home.

6. Keep Up With Advisory Fuel Rates (AFRs)

As an employer, you are required to reimburse your employees for business-related expenses. That includes business travels and any petrol costs they rack up. It can be tricky to determine the right compensation, but there are two tools to help you:

fuel rate check
  1. Advisory Fuel Rates (AFRs)
  2. GPS trackers

AFRs are recommended reimbursement values by the HMRC, taking the guesswork out of deciding on an appropriate compensation rate. Paired with GPS trackers that show you exactly how many business miles are driven, you can accurately reimburse and report business mileage.

7. Know the Exemptions

Your company car is exempt from tax on company cars in the UK if the vehicle:

  • Is available for business journeys only
  • 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 (used only by on-call employees of the police, fire and rescue, ambulance or paramedic services)
  • Is privately owned
  • Is a pool vehicle, as noted above

Furthermore, petrol that employees pay for themselves is exempt from tax on company cars in the UK.

Navigating Tax on Company Cars UK

Keeping these tax rules on company cars in mind will help you structure your salary sacrifice scheme, choose the right company car for your business, and avoid penalisation. Once you understand how emissions, petrol type, and car specs impact your P11D value, you are better positioned to strategise your fleet from a tax perspective.

And don’t forget, you’re required to maintain company car records for 6 years. Fleet telematics make this easy by ongoing tracking, with no extra work for you. 

→ GPS Trackers Not Only Reduce Overall Fleet Costs, But They Make It Easy To Prove Business And Personal Trips To HMRC.

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