How is company car tax calculated?
For most company car users, the biggest downside is the tax to be paid for the ‘benefit’ of having a car. As soon as you use the car for a personal reason – which includes driving to and from work – Her Majesty’s Revenue and Customs (HMRC) sees it as a taxable asset (or benefit in kind in government speak).
The benefit in kind rate that HMRC attaches to your car is a percentage of its P11D price (the list price including VAT and delivery charges but excluding the first registration fee), based on how much CO2 it emits. The lower the car’s emissions, the lower the rate of BIK; for example, a zero emission car has a rate of 9% and a car with high emissions will attract a rate of 37%.
To calculate your benefit in kind tax, multiply the car’s P11D value by the percentage that applies to its CO2 emissions. Then you’ll need to multiply that figure by the income tax band you are in: either 20% or 40%. This will give you the amount of tax that will be deducted from your wages.
As an example, a BMW 320d M Sport auto saloon with a P11d value of £38,060 and emissions of 113g/km will have a company car tax rate of 30%. That means the benefit in kind tax is £11,418, which will equate to a cost of £2284 per year for a 20% taxpayer and £4567 for a 40% taxpayer.
It’s worth noting that the 2017 Finance Bill changed the rules on how much company car drivers pay in tax. Instead of simply being taxed on the benefit in kind value of their chosen vehicle, they will be taxed on whichever is higher – the benefit in kind value or the salary sacrifice amount. This change applies to all vehicles except ultra-low emissions ones, which are governed by the previous rules until 2021.