Company cars are one of the most common types of employee benefits.
However, their status as a ‘benefit-in-kind’ (BiK) means they’re subject to taxation, and there are various rules and hoops to jump through.
Here, we break down the ins and outs of how company cars are taxed and what it means for both employers and employees.
Company cars as a BiK: what it means
From a tax perspective, company cars are considered a non-cash benefit. This is because the vehicle can also be used for personal reasons in addition to its professional use.
Tax liability for employers and employees
When an employee is provided with a company car, both the employer and employee have tax obligations:
- The employee will need to pay tax on the benefit value of the car.
- The employer has a dual responsibility. Firstly, they must account for the benefit and deduct the tax from the employee’s paycheck. Secondly, they’re also subject to National Insurance contributions (NICs) based on the car’s value.
How is the tax on company cars calculated?
You can work out the ‘taxable value’ of a company car in a few different ways:
- through commercial payroll software
- using HMRC’s online calculator
- manually on the P11D form.
It’s important to note that the taxable value of a car is different from the cost. It also takes into account the car’s fuel type, level of CO2 emissions, and the amount of time the car is unavailable within the tax year.
Working out this figure using payroll software can be less time-consuming compared to calculating it manually. For example, Xero’s payroll function calculates and deducts the tax due from your employees’ pay checks automatically, cutting out the need for a P11D form altogether.
P11D form method
Alternatively, employers can report the benefit using the P11D form. The submission deadline for this form is 6 July after the end of the relevant tax year.
When using this method to calculate and declare the taxable value (also known as the P11D value), you’ll need to add together the following:
- the list price of the car (inclusive of VAT)
- any delivery charges (excluding the initial registration fee)
- the car tax for the first year.
This total represents the car’s P11D value for tax purposes. To find the annual tax on the company car, you then need to:
multiply the P11D value by the vehicle’s percentage banding
multiply this figure by the employee’s income tax band.
These calculations aren’t always straightforward, so we’d recommend consulting a payroll professional to make sure you get it right the first time.
Strategies for tax-efficient company cars
There are clear strategies that businesses can use to provide company cars in a more tax-efficient way.
1. Employee capital contributions
One of way to lighten the tax burden on your employees is to allow them to contribute towards the cost of their company car. Here’s how it works:
Employees can contribute up to £5,000 towards the purchase price of their company car, potentially reducing their tax bill as a result. This strategy won’t necessarily result in tax savings for basic-rate taxpayers, but may be beneficial for higher earners.
2. Other tax calculations
It’s essential to understand that the tax liability for company cars isn’t solely based on the car’s purchase value. There are other factors in play:
Fuel, engine and emissions
When calculating tax on company cars, you must consider the type of fuel the vehicle uses, its engine size and emission levels. These elements can drastically affect the total taxable value.
The tax rules also differ for electric vehicles (EVs). For example, businesses can claim up to 100% of an EV’s cost through capital allowances. This means that companies can receive tax relief on the entire vehicle value in its first year.
3. Advisory fuel rates
If you provide company cars to your employees, you should also know the advisory fuel rates (AFR) for petrol and diesel vehicles and advisory electric rates (AER) for electric vehicles.
Set by the Government every quarter, these rates give businesses a fair estimate of how much drivers should pay for fuel based on engine size, miles per gallon and fuel prices.
There are two main scenarios where these rates apply:
- when reimbursing employees for business travel in their company cars
- when you need employees to repay the fuel used for personal journey.
You can find the most up-to-date advisory rates on the Government website.
Navigating the maze of employee benefits and company cars might seem challenging, but it’s relatively simple once you’re used to the process.
If you’re looking for a tax-efficient method to provide company vehicles to your employees or need advice on offering a competitive compensation package, contact our expert accountants for professional guidance.
We’ll help you and your team get the most out of benefits-in-kind.