Company car taxation – what you need to know

Company car tax changes

Constant changes to company car tax mean that anyone with responsibility for fleets or in possession of a company or salary sacrifice arrangement car needs to keep up to speed with the latest tax rules. Company car tax was reformed in April 2002 to an emissions-based system. Since then the charge is calculated by applying a percentage figure (the appropriate percentage) to the list price of the car. The fuel type of the car and its CO2 emissions determine the appropriate percentage. Diesel cars attract a 3% uplift on the benefit in kind (BIK) compared to petrol cars with the same CO2.

Over the years the table of appropriate percentages has been updated to encourage the take-up of lower CO2 emission vehicles. The tables have been expanded to recognise qualifying low emission cars and ultra low emission vehicles.

In 2008, a 10% BIK rate for cars with a CO2 rating of 120 g/km or less was introduced and led to a growth in cars provided using salary sacrifice. However, from April 2017 new rules were introduced for salary exchange schemes, known as optional remuneration arrangements (OpRAs). These negate the income tax and national insurance contribution (NIC) advantages that can exist where some BIKs are subject to tax and NIC on an amount that is less than the salary sacrificed or foregone.

Benefit in kind values

From 6 April 2017, where an employee has a choice, the BIK will be valued at the higher of the cash foregone or the current taxable value, for both income tax and employer NICs (and employee NICs where a charge already exists). Arrangements between an employee and employer, which are binding on both parties and entered into on or before 5 April 2017, are protected until the earlier of:

  • Variation in the terms of the BIK, or renewal of the contract;
  • The employee changes employer;
  • 6 April 2018; or
  • 6 April 2021 for cars with emissions of more than 75g CO2/km

Electric cars

The company car tax on electric cars will rise to 1% in 2021-22 and 2% in 2022-23. This applies retroactively to electric company cars already registered before the 6 April 2020 introduction date for the new rates.

Hybrid cars

As mentioned above the BiK rates are determined by CO2 emissions of the vehicle and plug-in hybrids (PHEVs) also have to pay company-car tax. However, the level of the tax charge also depends on how far the PHEV can be driven with zero emissions.

The below table shows what the BiK rates for PHEVs will be over the next three financial years, for cars first registered on or after 6 April 2020. From this date on, company-car tax will be calculated on CO2 figures from the latest WLTP fuel-economy and emissions testing procedure.

CO2 (g/km)Electric range (miles)2020-21 rate (%)2021-22 rate (%)2022-23 rate (%)
1-50>130012
1-5070-129345
1-5040-69678
1-5030-39101112
1-50<30121314

The rates vary slightly for cars first registered before 6 April 2020. CO2 emissions for these cars will be taken from the outgoing NEDC fuel-economy and emissions testing procedure, and the rates will be as follows:

CO2 (g/km)Electric range (miles)2020-21 rate (%)2021-22 rate (%)2022-23 rate (%)
1-50>130222
1-5070-129555
1-5040-69888
1-5030-39121212
1-50<30141414

The method of calculating the BiK value is the same for PHEVs as it is for normal and electric cars. However, it’s important to note that for plug-in hybrid and electric cars, the list price of the vehicle (used in the P11D value) must always include the cost of the battery. This applies even if the battery is leased separately. If it is leased by the employer on behalf of the employee, this has to be listed as a taxable benefit at a cost to the employer.

How does it affect drivers?

The BIK increases affect driver decisions as to how financially beneficial a car taxed as a company car is. However, there is still a fine balance in relation to some of the alternatives, as follows:

  • Cash: simply taking a cash alternative could be the answer, but that is taxed at the marginal rate. The remaining net pay would then be required to pay for the procurement, insurance and maintenance of a car.
  • Salary sacrifice: the optional remuneration arrangement rules could impact particularly cars with a CO2 in excess of 75g/km. However, when salary sacrifice was originally gaining popularity many employers focused on the ‘added value’ benefit of making it easier for employees to have a new car, fully insured and maintained at an affordable cost. This should still be carefully considered as a key feature of these arrangements.

What do you still need to consider?

Company car tax is based on the availability of the vehicle for private use. So the comparison should be against the costs of personally leasing a similar car. It is understood that up to 90% of new cars are procured from dealers via a finance arrangement and while personal contract purchase (PCP) is very popular, the number of customers that retain the vehicles at the end of the agreement is very low.

Also, with a car owned outright the responsibilities lie solely with the driver, whereas with a company car the employer or leasing company will deal with road fund licence renewals, servicing, MOT, repairs, tyre replacement, etc.

Business Mileage

Business mileage and fuel also needs to be considered. It is highly likely that however procured the car will be used for some business use and the implications of inaccurate or incorrect mileage records is different depending upon the ‘ownership’ of the car. Inaccurate mileage can lead to tax and NIC liabilities on a BIK of several thousand pounds for an error involving just a few pounds worth of fuel.

With a ‘private’ car the potential implications of inaccurate or incorrect mileage claims would be tax and NIC liabilities linked to the actual costs of mileage that was wrong. In addition, the rates applicable for reimbursement to employees include an automatic profit element that is not liable to tax and NIC as it is intended to contribute towards additional insurance, running costs and wear and tear.

Where mileage rates below the HMRC approved mileage allowance payments (AMAPs) for employees using their own cars on business are paid by the employer, the employee is still entitled to claim tax relief on the difference at the end of the tax year.

Conclusion

For some, company cars are an increasing financial burden, for others they still represent good value by reducing hassle and responsibilities, and the costs are worth paying in comparison with the increase in the costs of procuring and running a private car. There is no one size fits all and the decisions can be further complicated by new legislation, such as the OPRA regulations that will mean that alternative tax calculations will need to be taken to decide what tax is due and needs reporting on P11Ds.

If you would like further information on any of the above please get in touch with our motor sector specialists on 01903 234094.