Are you an employee who receives a company car allowance as part of your benefits package? If you answered yes, then get ready to learn about how much tax you could potentially be paying on that perk. When you’re given a car allowance, the general assumption is that you’ll be driving a company car which would translate to a lower tax bill. Unfortunately, this isn’t always the case. The tax implications tied to company car allowances can be quite complex and lead to hefty expenses come tax season.
For most working individuals, a car is a necessary item to help carry out their day-to-day activities, and having a company car allowance, that too tax-free, can sound like a dream come true. However, if you’re not well-versed with tax law, you may not realize that the government considers car allowances as a form of taxable income. This means that you could be subjected to hefty taxes on what you initially deemed as a significant work-related benefit. To make things more complex, the amount of tax you’ll pay on your company car allowance can vary depending on a host of factors, including the type of car, the fuel it uses, and your annual income.
Despite the complexities of taxation laws, you can’t overlook the fact that vehicle expenses can make up a significant portion of your monthly budget. Therefore, it’s essential to have a solid understanding of what you’re getting into when you accept a company car allowance and how it could affect your tax return. In this article, we’ll dive deeper into the ins and outs of company car allowances and provide insight into how much tax you can expect to pay. Stay tuned, as we help you get a better grasp of this important aspect of compensation.
Taxable benefits of company cars
When an employer provides an employee with a company car for both business and personal use, the employee is deemed to have received a taxable benefit known as a company car benefit. The taxable amount is based on the car’s list price, CO2 emissions, and fuel type, as well as the employee’s income tax bracket. The employee is taxed on this amount according to the applicable income tax rates, which can vary between countries.
- Most company cars are subject to a fixed percentage tax based on the car’s CO2 emissions. The tax rates vary depending on the vehicle’s emissions levels, with lower emission cars (below 75g/km) having lower tax rates.
- The taxable amount for low emission cars is calculated at 1-6% of the car’s list price, while high emission cars (over 185g/km) have a taxable amount of 30% of the car’s list price.
- Employees who receive free fuel for personal use from their employer in addition to a company car also have a fuel benefit charge based on the same CO2 emissions table.
In addition to the company car benefit, employees may also be charged National Insurance contributions (NICs) on the taxable amount. The NIC rate varies for each income tax bracket.
It is important for employees to understand that they will be responsible for paying the income tax, NICs, and fuel benefit charge on their company car benefit. Employers may also be responsible for paying Class 1A NICs on the amount.
| CO2 Emissions (g/km) | Tax Percentage |
|---|---|
| 0-50 | 1-6% |
| 51-75 | 11% |
| 76-94 | 16% |
| 95-99 | 17% |
| 100-104 | 18% |
| 105-109 | 19% |
| 110-114 | 20% |
| 115-119 | 21% |
| 120-124 | 22% |
| 125-129 | 23% |
| 130-134 | 24% |
| 135-139 | 25% |
| 140-144 | 26% |
| 145-149 | 27% |
| 150-154 | 28% |
| 155-159 | 29% |
| 160+ | 30% |
Note: Rates are based on the UK Government guidelines and may vary in other countries.
How is the company car allowance taxed?
If you are given a company car allowance, you may be wondering how much of it will go towards tax payments. The amount you pay depends on a variety of factors such as the value of the car, the level of CO2 emissions and your income tax rate. Here is a breakdown of how the company car allowance is taxed:
- The value of the car: The amount of tax you pay increases as the value of the car increases. The value is calculated based on its list price when it was first registered.
- The level of CO2 emissions: The higher the emissions, the more tax you will pay. This is because the government is discouraging the use of high-emission vehicles.
- Your income tax rate: Your tax rate will depend on how much you earn. If you are a higher rate taxpayer, you will pay more tax on your company car allowance.
As an example, if you are given a company car allowance of £10,000 and the value of the car is £20,000 with emissions of 130g/km, and you are a higher rate taxpayer, you can expect to pay £4,300 in tax. If the CO2 emissions are 75g/km, you would pay £2,500 in tax.
It is worth noting that if you opt for a low-emission car, you will pay less tax. The government offers an incentive for choosing eco-friendly vehicles by reducing the amount of tax you need to pay. You can find out the tax rate for your specific car by looking up its CO2 emissions rating.
| CO2 emissions (g/km) | Percentage of list price subject to tax |
|---|---|
| 0-50 | 1% |
| 51-75 | 15% |
| 76-94 | 16% |
| 95-99 | 17% |
| 100-104 | 18% |
| 105-109 | 19% |
| 110-114 | 20% |
| 115-119 | 21% |
| 120-124 | 22% |
| 125-129 | 23% |
| 130-134 | 24% |
| 135-139 | 25% |
| 140-144 | 26% |
| 145-149 | 27% |
| 150-154 | 28% |
| 155-159 | 29% |
| 160 or more | 37% |
If you are unsure about how much tax you will need to pay on your company car allowance, it is recommended to speak to a qualified tax advisor who can provide you with more personalised advice.
Tax implications of choosing a company car or car allowance
When it comes to choosing between a company car or car allowance, the tax implications can vary greatly depending on your situation. Here are some factors to consider:
- Benefit-in-kind (BIK) tax: If you choose a company car, you will be subject to BIK tax. This tax is based on the CO2 emissions of the car, its list price, and your income tax bracket. The higher the emissions and list price of the car, the more BIK tax you will have to pay. On the other hand, if you opt for a car allowance, you will not be subject to BIK tax.
- National Insurance Contributions (NICs): If you receive a company car, your employer will have to pay NICs on the value of the car. As an employee, you will also have to pay NICs on any company car fuel you use for personal trips. If you choose a car allowance, neither you nor your employer will have to pay NICs.
- Fuel costs: If you opt for a car allowance, you will be responsible for covering the cost of fuel. On the other hand, if you have a company car, you will generally be provided with a fuel card or have the option to claim mileage expenses for business trips. Keep in mind that fuel costs are tax-deductible for both company cars and car allowances.
Ultimately, the tax implications of choosing a company car or car allowance will depend on your specific circumstances. You should take into account factors such as your income tax bracket, anticipated usage of the car, and fuel costs when making your decision.
Comparison Table
| Company Car | Car Allowance | |
|---|---|---|
| Subject to BIK tax | Yes | No |
| Subject to NICs | Employer pays on value of car, employee pays on personal fuel | No |
| Responsible for fuel costs | Company pays for fuel or provides fuel card/mileage reimbursed for business trips | Employee pays |
It’s important to carefully consider both the financial and practical implications of choosing a company car or car allowance. Consulting with a financial advisor or tax specialist can also help ensure that you make the right decision based on your specific circumstances.
The Effect of CO2 Emissions on Company Car Tax
One of the primary factors that determines the amount of company car tax is the level of CO2 emissions produced by a vehicle. The UK government uses CO2 emissions as a measure of the environmental impact of a car. The more CO2 a car produces, the more tax the driver will have to pay. According to HM Revenue & Customs, the current rates for the 2021/22 tax year range from 1% to 37% of the car’s list price.
How CO2 Emissions Affect Company Car Tax Rates
- The lower the CO2 emissions, the lower the tax rate.
- Electric cars have the lowest tax rate of 1%, which means that there is very little company car tax to pay on them.
- The highest tax rate of 37% applies to cars that emit more than 225g/km of CO2.
Why CO2 Emissions Are Important for Company Car Tax
The UK government is committed to reducing carbon emissions from cars, and the use of CO2 emissions to determine tax rates is one way of encouraging businesses to choose more environmentally friendly cars. By providing tax incentives for low-emission cars, the government is supporting the transition to a greener economy.
The use of CO2 emissions to calculate company car tax rates also provides an incentive for manufacturers to develop cleaner and greener cars. As the tax rates increase with CO2 emissions, manufacturers have an incentive to reduce the emissions of their vehicles in order to make them more attractive to buyers.
CO2 Emissions and Plug-In Hybrid Cars
Plug-in hybrid cars are a popular choice for company car drivers, as they provide a balance between electric power and range. However, the tax rates for plug-in hybrids are based on the car’s electric range and CO2 emissions. This means that a plug-in hybrid with a low electric range and high CO2 emissions could incur a higher tax rate than a traditional petrol or diesel car.
| Electric Range (miles) | CO2 Emissions (g/km) | Tax Rate (2021/22) |
|---|---|---|
| 130 | 0 | 1% |
| 70 to 129 | 1 to 50 | 6-12% |
| N/A (less than 70) | 1-50 | 16-37% |
As you can see from the table above, electric range has a significant impact on the tax rate for plug-in hybrids. Drivers who regularly travel long distances may find that a traditional petrol or diesel car is a more cost-effective option, particularly if the plug-in hybrid has a low electric range.
In summary, the level of CO2 emissions produced by a company car has a significant impact on the amount of tax that needs to be paid. By choosing a car with low emissions, drivers can save money on company car tax while also supporting the UK’s transition to a greener economy.
How to Calculate Company Car Tax
Calculating company car tax can be a tricky process, but it’s important to understand how it works so you can stay on top of your tax obligations. Here are five steps you can take to calculate your company car tax:
- Determine the list price of the car
- Identify the car’s CO2 emissions level
- Find out your income tax bracket
- Calculate the car’s benefit-in-kind (BIK) value
- Multiply the BIK value by your income tax bracket to determine your company car tax liability
Let’s take a closer look at each step:
Step 1: Determine the list price of the car
The list price is the manufacturer’s recommended retail price of the car when it was first registered, including any optional extras. It doesn’t include any discounts, as these are not taken into account when calculating company car tax. You should be able to find the list price on the car’s registration certificate or invoice.
Step 2: Identify the car’s CO2 emissions level
The CO2 emissions level determines how much tax you’ll pay based on the car’s impact on the environment. The lower the CO2 emissions, the lower your tax liability. You can find out the emissions level of your car on its registration certificate or by checking with the manufacturer.
Step 3: Find out your income tax bracket
Your income tax bracket is based on your total income, including any bonuses and benefits. The higher your income, the higher your tax bracket and the more you’ll pay in company car tax. You can find your income tax bracket by checking with your employer or by consulting a tax specialist.
Step 4: Calculate the car’s benefit-in-kind (BIK) value
The BIK value is the amount you’ll need to pay tax on for using a company car. It’s based on the list price of the car, its CO2 emissions level, and your income tax bracket. The HM Revenue & Customs website provides a company car tax calculator that can help you determine the BIK value of your car.
Step 5: Multiply the BIK value by your income tax bracket to determine your company car tax liability
Once you have calculated the BIK value of your car, you’ll need to multiply it by your income tax bracket to determine how much tax you’ll need to pay. This will give you your annual company car tax liability.
| CO2 Emissions (g/km) | 2021-22 BIK Rates (%) |
|---|---|
| 0-50 | 1 |
| 51-55 | 2 |
| 56-59 | 3 |
| 60-64 | 4 |
| 65-69 | 5 |
| 70-74 | 6 |
The above table shows the BIK rates for cars with different CO2 emissions levels in the tax year 2021-22. It’s important to note that BIK rates change each year and can differ depending on the age of the car.
By following these steps, you can accurately calculate your company car tax liability. Remember to stay on top of your tax obligations to avoid penalties and fines from HM Revenue & Customs.
VAT and Company Cars
If you are a business owner planning to purchase, lease, or provide company cars to your employees, it is important to understand the Value Added Tax (VAT) implications of doing so. VAT is a tax charged on most goods and services in the UK.
When it comes to the VAT on company cars, the rules are slightly different depending on the way the car is used. Here’s a breakdown:
- If the company car is used exclusively for business purposes, the VAT on purchase or lease can be fully reclaimed.
- If the company car is used for both business and personal purposes, the VAT on purchase or lease can still be fully reclaimed, but a VAT charge will apply on the personal usage element of the car’s running costs.
- If the company car is used exclusively for personal purposes, the VAT on purchase or lease cannot be reclaimed.
To calculate the VAT charge on the personal usage element of a company car, you can use a flat rate percentage which is determined by HM Revenue and Customs (HMRC). Currently, the flat rate percentage for employees who pay tax through Pay As You Earn (PAYE) is 16.5% of the list price of the car (including VAT).
It’s worth noting that if your business is not registered for VAT, you cannot reclaim VAT on any company car purchases or leases. Additionally, VAT may also be charged on any fuel or maintenance costs for the company car.
Company Car Tax
In addition to VAT, it’s important to consider the implications of company car tax. This is the tax paid by employees who use a company car for personal purposes, and is based on the car’s list price when new, its CO2 emissions, and the employee’s income tax bracket.
The amount of tax payable on a company car can vary significantly depending on the car’s value, fuel type, and emissions, as well as the employee’s income tax bracket. In general, the higher the value of the car and the more CO2 it emits, the higher the tax liability.
| CO2 Emissions (g/km) | 2019/20 Car Tax Rates (% of list price) |
|---|---|
| 0-50 | 16% |
| 51-75 | 19% |
| 76-94 | 22% |
| 95-99 | 23% |
| 100-104 | 24% |
| 105-109 | 25% |
| 110-114 | 26% |
| 115-119 | 27% |
| 120-124 | 28% |
| 125-129 | 29% |
| 130-134 | 30% |
| 135-139 | 31% |
| 140-144 | 32% |
| 145-149 | 33% |
| 150-154 | 34% |
| 155-159 | 35% |
| 160+ | 37% |
It’s worth noting that from April 2020, the tax rates for electric vehicles will be significantly reduced, with a rate of 0% for vehicles with zero emissions.
Overall, it’s important to carefully consider the VAT and tax implications of company cars before making any purchases or commitments. Working with a tax professional and carefully assessing your business needs can help ensure you make the right decisions for your company and employees.
National Insurance contributions on company car allowance
If you receive a company car allowance, you are liable to pay National Insurance contributions (NICs) on the amount you receive. These contributions are calculated based on the value of the car and your personal income tax band. The higher the value of the car, the higher the NICs.
The NICs also depend on whether you have opted for the cash allowance or the company car. Usually, if you opt for the cash allowance, your employer will adjust your salary to reflect this, and your NICs will be calculated on the adjusted salary.
How are National Insurance contributions calculated?
- NICs are calculated on the basis of the value of the car
- The value of the car is determined by the list price of the car when it was first registered, including any accessories or modifications that were added
- For cars purchased after April 6, 2020, the value is determined by the CO2 emissions of the car and the list price
How are National Insurance contributions paid?
You will pay NICs through deductions from your salary, which your employer will make on your behalf. Your employer will also make contributions on your behalf, which will be reflected in your annual statement of earnings.
It is important to note that you will not be entitled to claim back the NICs that you have paid on your company car allowance.
National Insurance contributions and the company car tax calculator
If you are unsure of how much NICs you need to pay, you can use the government’s company car tax calculator to work out this figure. The calculator will determine the amount of tax you owe based on the value of the car and your personal income tax band.
| Income Tax Band | NICs |
|---|---|
| Basic rate (20%) | 13.8% |
| Higher rate (40%) | 13.8% |
| Additional rate (45%) | 2% |
As you can see from the table, higher rate and additional rate taxpayers will pay the same amount of NICs. This is because the higher rate of tax is taken into account when calculating the NICs.
It is important to keep track of your NICs, as failure to pay them can result in penalties and interest charges from HM Revenue and Customs.
How much tax do you pay on company car allowance?
Q: Do I have to pay tax on my company car allowance?
A: Yes, you have to pay tax on your company car allowance as it is considered a taxable benefit.
Q: How is the tax on my company car allowance calculated?
A: The tax on your company car allowance is calculated based on the car’s CO2 emissions, its list price, and your personal income tax bracket.
Q: Is there a flat tax rate for company car allowances?
A: No, there is no flat tax rate for company car allowances. The tax you pay is dependent on the factors mentioned in the previous question.
Q: Will the tax I pay on my company car allowance change year-on-year?
A: Yes, the tax you pay on your company car allowance may change year-on-year as it is dependent on the car’s CO2 emissions and list price, both of which can change.
Q: Can I opt out of receiving a company car allowance?
A: Yes, you can opt out of receiving a company car allowance and instead use your own vehicle for work purposes. This may be a more tax-efficient option for you.
Q: Is it possible to reduce the amount of tax I pay on my company car allowance?
A: Yes, it is possible to reduce the amount of tax you pay on your company car allowance by choosing a car with lower CO2 emissions or opting for an electric car which has a tax benefit in the UK.
Thanks for Reading!
We hope that this article has helped answer some of your questions about how much tax you pay on a company car allowance. Remember, the tax you pay is dependent on several factors, so it is important to do your research before making a decision on your car. If you have any further questions, don’t hesitate to reach out to your HR department or a tax professional. Thanks for reading and make sure to visit us again for more helpful articles!