Company car tax guide

A company car can be a great perk, but it pays to choose wisely to keep your tax bill low. Here’s how to pick a car that suits your needs and your pocket…

At its simplest, a company car is a vehicle supplied by an employer to an employee, which can be used for private journeys as well as for work. The employee gets a shiny new car, and the employer knows your work journeys are being undertaken in a car that’s modern and safe. It’s a win-win, at least in theory.

Of course, there’s no such thing as a free lunch – or car, in this case. You need to think carefully about the car you drive when deciding if a company car is right for you.

In this feature, we’ll look at how the company car system works, and how you can get the biggest bang for your buck when choosing your new car.

How does company car tax work?

If your employer offers you a car as part of your pay and benefits, then you must pay tax on it. Unless it is used exclusively for work purposes, HMRC sees the car as a benefit, so benefit-in-kind (BIK) tax has to be paid. The money will be taken from your pay packet each month. Strictly speaking, it’s the employer who pays for the car. Most likely it will be leased for a fixed term – usually between two and four years – rather than bought outright.

How much you pay depends on the value of the car and how much carbon dioxide (CO2) it produces. For plug-in hybrid vehicles (PHEVs), the all-electric range is also a factor. But essentially, the more expensive the car and the more it emits, the more you pay.

How is company car tax calculated?

To work out your company car tax bill, you will need to know the car’s P11d value and its official C02 emissions figure.

The P11d value is the list price, including VAT and delivery charges, but not including the first registration fee or the first year’s Vehicle Excise Duty (VED) charge. If the car has been ordered with optional extras such as metallic paint, these need to be included in the P11d value.

The C02 emissions will be listed on the car’s V5 document (the logbook), or if you are still choosing between different company cars you can find the emissions figure on the manufacturer’s website.

Let’s say your company car has a P11d value of £30,000, and CO2 emissions of 150g/km. That puts it in the 35% BIK band. You will be taxed on £10,500 per year (35% of £10,500).

If you are a 40% tax payer, you will pay £4200 over the year (40% of £10,500). That works out as £350 per month, which will be deducted from your pay packet. If you’re a 20% tax payer, just half that value.

You can also use our own company car tax calculator to work out how much you’ll be charged.

Tax bands run from 1% to 37% in 2021/22, and 2% to 37% in 2022/23. The tax rates are slightly different depending on whether the company car was registered before or from 6 April 2020, because this is when the car’s official CO2 output moved from NEDC test figures to the tougher WLTP protocol.

Company car tax bands from 6 April 2020 

Cars registered after 6 April 2020

Cars registered before 6 April 2020

How can I cut my tax bill?

The most effective way of cutting your company car tax bill is to run an electric car. Pick an electric vehicle (EV), and you’ll pay BIK at a rate of just 1% for what’s left of the 2021/22 tax year, rising to 2% for 2022/23 and the following two tax years. Those rates are so low that you can run a luxurious EV with a monthly tax bill similar to the price of a family takeaway.

If you don’t feel ready to run an electric car but still want a low tax bill, a plug-in hybrid (PHEV) is the next best thing. These are cars that use both an internal combustion engine and an electric motor (or motors). The BIK percentage for a PHEV varies depending on the car’s C02 emissions and electric range. The lower the emissions, and the longer the range, the more favourable the BIK percentage. Reckon on around 8%-14%.

To put that in perspective, if you are running a conventional petrol or diesel as a company car the BIK percentage could be up to 37%. So an electric car or a plug-in hybrid is the way to go if you want the lowest tax bill.

What are the most expensive cars to tax?

Just as low-emission vehicles attract the lowest tax bills, so thirsty, high-emitting cars are the most expensive. Over the years, HMRC has steadily toughened the rules, so a car doesn’t have to be an out-and-out gas-guzzler to land its driver with a high tax bill.

In 2021/22, cars with CO2 emissions of 170g/km or more sit in the top 37% tax band, and so cost roughly three times as much in tax as a plug-in hybrid of the same value.

It’s not just about emissions. The higher the P11D value, the bigger the cut that will be taken from your salary each month. Don’t forget, the cost of options is included, so specifying lots of extra luxuries will push up the tax payment.

Think about the type of car you choose, too. Some SUVs can make fine company cars, but the equivalent executive saloon will generally have a lower CO2 figure, and so a lower BIK banding.

What about fuel?

If your employer pays for all your fuel, including private journeys, then this is another taxable benefit.

Is it worth having free fuel if in reality it’s not ‘free’ at all? Well, it largely depends how far you drive, and how much your car emits. HMRC uses a fixed amount (for 2021/22, it’s £24,600) and then multiplies it by the tax banding of the car you drive. So free fuel for a car in the 37% bracket would mean paying tax on £9102. For a 40% taxpayer that means waving goodbye to £3640 per year. Unless a company car driver covers tens of thousands of private miles annually, in this example they will be better off paying for their own fuel.

The sums are more likely to add up for a high-mileage driver with a low-emitting car.

What are the alternatives to a company car?

One different way of running a car through your employer is a salary sacrifice scheme. In return for a new car, you agree to take a lower salary, so you pay less income tax and National Insurance. However, the car is still deemed a benefit by HMRC, so you’ll still pay tax on it. Rather than seeing salary sacrifice as an alternative to a company car, it’s really a company car with slightly different tax arrangements. 

A genuine alternative to a company car is running your own personal vehicle on business. This is sometimes referred to as the ‘grey fleet’. Your employer is likely to offer a cash allowance per mile travelled, or will cover the cost of fuel for business journeys. 

For an employee, the biggest benefit of running your own car on business is complete control over the car you choose to drive. What’s more, you could also save money if you run an older, relatively cheap car. However, if you still want to drive a brand new car you will almost certainly pay more each month in finance payments than you would in BIK tax. 

You could also be offered a car allowance by your employer. You’ll pay tax on this allowance at your income tax rate, but you can then use what’s left to buy the car you want. This is a big plus if your employer offers a very restricted choice of company cars.

What’s the difference between a pool car and a company car?

A pool car is only available for business use, and is shared between employees. Because a pool car is not a benefit, you won’t be taxed if you have access to a pool car, so long as it is only used for work purposes.

Should I take a company car if my employer offers one?

For most business drivers, the answer to this is ‘yes’. Monthly tax bills typically work out lower than financing the same car as a private buyer. It’s not for everyone, though, particularly if you want to run a car that your employer doesn’t offer or if you already own a car that you are happy to keep for a few more years.

If you plan to drive a new electric car or a plug-in hybrid, then opting into a company car scheme is a no-brainer. Rock-bottom tax rates mean these cars are much more affordable as a company car than if you spend your own money on one.

Quickly calculate your BIK bill with our company car tax calculator >>

Keyword: Company car tax guide