If you are thinking about buying or leasing a car through your private limited company, this blog will provide you with an essential guide to company car tax in the UK.
We also discuss electric cars which have recently become a popular choice of company car due to their favourable tax rates.
What is company car tax?
Company car tax is twofold: the employee (company car user) pays income tax on the benefit in kind, and the employer (e.g. limited company) pays employer’s National Insurance contributions on the same benefit.
How much does an employer pay?
Company car tax for the company is employer’s National Insurance contributions on the considered benefit of the car (see how this is calculated below, along with examples).
Currently, this is charged at 15.05% and is paid through the PAYE system annually, on or by 21 July each year, unless the car benefit is included in the monthly payroll and taxed each month.
How much does an employee pay?
The employee who has the company car must also pay tax on the considered benefit. The total tax to pay will depend on their tax status (i.e. whether they are a basic rate or a higher rate taxpayer).
Tax is charged on the benefit in kind and is considered to be taxable income, in addition to their salary and dividends (if applicable).
As mentioned above, it can be processed alongside payroll, as a taxable benefit. However, if it is not payrolled, the employee’s tax code will be amended by HMRC once they are notified.
Alternatively, it can be paid after declaring it through the annual Self Assessment tax return; however, this approach will only apply in the first year it is declared, as HMRC will adjust the employee’s tax code going forward.
If the company car benefit changes significantly (i.e. the car is replaced in the year), it will likely result in an adjustment on the Self Assessment tax return, or an adjustment to the tax code. However, HMRC should be notified of the change at the time it takes place.
The company and the employee must continue to declare the car benefit each year, regardless of whether it is payrolled or not. It is also important to be aware that the considered level of benefit may change each year, even if the car stays the same.
How is company car tax calculated?
Before we begin, it is important to point out that company car tax is calculated using the same method, regardless of whether the car is purchased outright, leased, or financed via hire purchase.
Company car tax is calculated on both the retail price and the CO2 emissions of the car (there are a series of bands that different cars fall into). An expensive car with high CO2 emissions will attract a large company car tax bill.
Company car tax on electric cars is currently 2%, significantly less than diesel and petrol cars.
4 examples of how company car tax is calculated
To better understand the impact different vehicle types have on company car tax, we have created 4 examples below.
Each of the following examples is based on:
- a car with a retail price of £40,000, registered in December 2020, whose driver has full access to the car in the tax year 2022/2023
- the diesel and petrol examples are based on CO2 emissions of 105 and engine size of 1401-2000cc
- individual tax charges will vary according to each employees’ tax threshold and residential status; however, we have provided a rough guide based on a higher rate taxpayer living in the UK
Example 1: Company car tax on a diesel car, meeting the Euro standard 6d (F)
The considered taxable benefit of a diesel car meeting the Euro standard 6d is £10,000.
The company’s tax charge will be £1,380 (which is 13.8% of £10,000).
The individual tax benefit to the employee, which must be declared as income, is £10,000 and the tax due is likely to be around £4,000-£4,100.
Example 2: Company car tax on a diesel car, NOT meeting the Euro standard 6d (F)
The taxable benefit of a diesel car that does not meet the Euro standard 6d is £11,600.
The company’s tax charge will be £1,600.80 (which is 13.8% of £11,600).
The individual tax benefit is £11,600; tax due – around £4,640-£4,756.
Example 3: Company car tax on a petrol car
The taxable benefit of the petrol car equivalent is £10,000.
As per example 1, the company’s tax charge will be £1,380.
The individual tax benefit is £10,000; tax due – around £4,000-£4,100.
Example 4: Company car tax on an electric car
The taxable benefit of the equivalent electric car is £400, which is significantly lower than diesel and petrol cars.
The company’s tax charge will be £55.20 (which is 13.8% of £400).
The individual tax benefit is £400; tax due – around £160-164.
And the electric car is the winner!
As we can see from the above examples, an electric car is the best option, given the current tax rates.
A diesel car that does not meet the Euro standard attracts the highest amount of company car tax. Both a petrol and diesel car meeting the Euro standard comes in second but are still fairly, expensive. The electric car is the winner, with the lowest impact on a company’s and an individual’s car tax.
The rates can and will change in future years. However, it would be reasonable to assume company car tax for electric cars will remain low for the foreseeable future.
What else must a company do if there is a company car?
A declaration must be made to HMRC every year using a form called P11Db – this should be submitted by 6 July each year. The employee must receive a similar form, called a P11D, which also must be submitted by 6 July. Both of these forms can be processed online.
The company must notify HMRC when a company car is given to an employee or replaced. This can either be done at the time the car is benefited to the employee by submitting a P46 to HMRC, or it can be processed through payroll.
To process the car benefit through payroll, it must be actioned before 5 April each year. See more on payrolling company car benefits here: https://www.gov.uk/guidance/payrolling-tax-employees-benefits-and-expenses-through-your-payroll
Speak to your accountant or payroll provider for more information on filing P11Db forms, or visit the GOV.UK website on reporting expenses and benefits: https://www.gov.uk/guidance/report-end-of-year-expenses-and-benefits-online
For more on company car tax…
HMRC’s Company Car and Car Fuel Benefit Calculator: http://cccfcalculator.hmrc.gov.uk/CCF0.aspx
Whilst the following GOV.UK page checks if the car has road tax, it also provides known CO2 emissions, engine size and year of the car’s registration: https://www.gov.uk/check-vehicle-tax
If you are deciding which car to buy, this GOV.UK website page on car fuel and CO2 emissions data is very useful: https://www.gov.uk/co2-and-vehicle-tax-tools