Company car tax – how does it work?

Are you thinking about buying a car via your limited company?

Before you go ahead, make sure you consider the tax implications of using a company car vs. using your own car and claiming back mileage costs.

Buying a car via your company is an attractive proposition to many – especially given the wide range of purchase options available, and special offers.

The company pays for fuel, servicing, and other costs, as well as the cost of the vehicle.

These costs can be offset against your company’s Corporation Tax bill.

The company can also claim capital allowances on the purchase price of the car.

However, what isn’t always obvious to many people is that both the company and the employee pay an additional Benefit in Kind (BiK) tax on the value of the vehicle.

The amount of tax you pay is based on various factors, including the car value, what your earnings are, and what type of fuel the car uses.

For example, if you are a high earner and drive an expensive car that emits a lot of CO2, you will pay the most.

How to reduce your company car tax

When you choose the type of car you want to buy via your company, find out which factors influence how large the BiK is.

If you only use the car on a part-time basis, you make a personal contribution towards the company car scheme, or if the car has low CO2 emissions, these factors can reduce the BiK charge.

Typically, a diesel car will have a BiK rate that is 4% higher than a petrol car.

If you are a high-mileage driver, you may find you can recover the difference simply through the better fuel economy you’ll receive.

However, if you only drive a short amount of distance in your company car, it may be more cost-effective to drive a petrol car.

Company car tax rates are updated every year, so make sure you keep on top of any changes.

How to calculate company car tax

If you’re not sure how much tax you owe, you can estimate the figure using the HMRC company car and fuel benefit calculator.

Your tax is calculated by working out what the car’s P11D value is; factors include:

• Car list price
• Cost of delivery
• VAT
• Optional extras (excluding road tax or registration fees)

You multiply this figure by a fixed percentage BiK band based on the car’s CO2 emissions to get the car benefit charge.

To work out your additional income tax, multiply this car benefit charge amount by the tax band the benefit falls into – 20%, 40% or 45%.

You don’t pay employees National Insurance on the benefits you get in your job, and this includes your company car.

However, your company has to pay employers’ NICs at 13.8% on the car benefit charge amount.

What if the company pays for fuel too?

If your company pays for fuel, there is an additional tax for this privilege.

This is based on a car fuel benefit multiplier which increases each year.

The employee pays income tax on the benefit, and once again, the company incurs an employers’ NIC charge.

Making changes – keep HMRC in the loop

Make sure your employer or accountant keeps HMRC up-to-date with any changes you make – for example if you change company car, or the company stops paying for fuel.

If the value of the car changes, HMRC will also update your tax code, so you’re always paying the right level of tax.

Company car vs. using your own car and claiming mileage

If you decide to use your own car for company business, the alternative is to claim a fixed mileage allowance.

HMRC’s fixed mileage rates haven’t increased with inflation over the years.

Here are the current rates:

• 45p per mile for the first 10,000 miles (24p for motor cycles).
• 25p per mile after 10,000 miles per year (24p for motor cycles).

You can even claim if you use a bicycle – 20p per mile for limitless miles.

These rates are meant to cover the running costs of your own vehicle – including repairs.

Any mileage costs are reimbursed to the employee. The company can offset the costs against its profits.

Final thoughts

As you can see, the way cars are taxed is complicated.

The decision to buy or hire a car through your company vs. claiming for mileage rests on many factors.

How many miles will you travel each year? Can your company get a good hire deal? Do you want to avoid paperwork?

In the end, it comes down to practicalities, and how much tax you’ll pay.

We recommend you chat with your accountant before you make your decision.

Read more in our complete guide to limited company expenses.