Company car tax can be rather taxing! So we wanted to explain the different Benefit in Kind rates.
In basic terms, your company-car tax contributions are calculated on the cost of the car, the amount of carbon dioxide emissions (CO2) it produces and how much you earn.
HMRC sees that the private use of a company car, including commuting, is a perk and is therefore classed as a Benefit-in-Kind (BiK). This effectively means that you’re receiving a financial benefit from your employer that isn’t part of your salary, and HMRC therefore taxes it separately. HMRC takes the P11D value of your car, which is the sum of its list price, cost of delivery, VAT and optional extras and multiplies it with a BiK rate, which is based on CO2 emission levels. This number is then multiplied by your income tax band. For example:
A petrol BMW 3 Series saloon has a P11D value of £32,985 and falls into the BiK band of 33% due to CO2 emissions of 144g/km of CO2. Therefore, the value of the car for company-car tax purposes is £10,995 (33% of £32,985). You’ll pay HMRC a percentage of £10,995 based on the rate of income tax you pay. In this example:
- 20% income-tax payer will pay £2,199 per year company-car tax
- 40% income-tax payer will pay £4,398 per year company-car tax
- 45% income-tax payer will pay £4,948 per year company-car tax
In the current 2022/23 tax year, all fully electric cars are eligible for a 2% BiK rate, and this is set to stay the same until at least April 2024. This is a huge subsidy and employees can make real savings, when their employer offers an electric vehicle as a company car.
Two sets of BiK Rates
A couple of years ago we saw a change in how a car’s carbon emissions were measured. The previous method was ‘New European Driving Cycle’ (NEDC). The new method, which is ‘World harmonised Light vehicle Test Procedure’ (WLTP) is seen as a more accurate representation of consumption and emissions in daily usage. However, those assessments tend to produce higher on-paper CO2 emissions than older NEDC tests that were recently phased out.
To fairly accommodate drivers of older company cars which would have been measured under the NEDC testing method, there are two sets of BiK rates for company cars. These two sets of rates see cars registered prior to 6 April 2020 subject to one set of BiK rates, and those registered after that date (which will have been assessed under WLTP) subject to another.
Current company car BiK rates using the WLTP method, start at 2% for electric cars and then increase on a scale, dependent upon CO2 emissions, up to a maximum of 37%. Diesel models are subject to a 4% supplement should they not meet RDE2 tests.
From the 2023/24 tax year, BiK rates are due to be merged to realign them once WLTP emissions testing has been fully implemented. Drivers of older diesel-powered cars will still incur a 2% surcharge on their company cars, unless they meet the latest RDE2 testing criteria, which all new cars must do.
Working out your company car tax
If you are looking to change your company car, we suggest you also look at the company car tax payable on the car. There are a few company-car tax calculators available online, such as What Car’s.
If you have any queries please contact Jackie or Andrew.