How Does Company Car Tax Work?

Lots of companies allow employees and executives to use their own paid for vehicles as an extra incentive outside of existing salaries. Unfortunately the government decided that tax (known as benefit in kind, or BIK tax) should be levied on company cars, which most businesses will deduct from your monthly salary to spread it across the year.

But how is company car tax calculated? Is fuel included within this tax? And do you still have to pay BIK tax if you’re not using the car? Read on to find out answers to these questions and more on how company car tax works.

How is company car tax calculated?

Company car tax is calculated by multiplying the vehicle’s P11D value by its BIK band percentage and your annual income tax band. 

You can work out your vehicle’s P11D value by adding together its list price with any accessories, delivery costs and its VAT value, and you can use our handy BIK table below to calculate your vehicle’s BIK percentage.

However, it might be far easier to check how much company car tax you might have to pay with HMRC’s online calculator.

2020/2021 company car tax changes

New changes have been introduced for the 2020/2021 tax year in light of the harsher European WLTP (Worldwide Harmonised Light Vehicle Test Procedure) emission tests replacing the old NEDC (New European Driving Cycle) tests and will come in effect from the 6th of April 2020. 

The WLTP tests provide more realistic results on what each new car emits and a lot of the time this will be higher (on paper) than the NEDC results. As such, it is expected that the same car tested using both types of assessment will now be seen as having higher CO2 emissions by roughly 20%, but this varies depending on the make and model.

This therefore affects the company car tax calculations, since they are predominantly worked out based on how much CO2 a car produces and the government is changing its BIK rates to reflect this.

Company car tax rates and bands

Your company car tax rates depend on when the car was/is registered and the amount of CO2 emissions it produces. Use the handy table below to find out the tax rates for your vehicle for the period of 2019-2023.

Add 4% (up to a maximum of 37%) to the values shown below for diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard.

BIK Rates(Electric, Petrol, RDE2 Diesel)
CO2 Emissions2019-202020-212021-222022-2023
0 g/km16%0%1%2%
1-50 g/km (range >130 miles)16%0%1%2%
1-50 g/km (range 70-129 miles)16%3%4%5%
1-50 g/km (range 40-69 miles)16%6%7%8%
1-50 g/km (range 30-39 miles)16%10%11%12%
1-50 g/km (range <30 miles)16%12%13%14%
51-54 g/km19%13%14%15%
55-59 g/km19%14%15%16%
60-64 g/km19%16%17%18%
65-69 g/km19%16%17%18%
70-74 g/km19%17%18%19%
75-79 g/km22%18%19%20%
80-84 g/km22%20%21%22%
85-89 g/km22%20%21%22%
90-94 g/km22%21%22%23%
95-99 g/km23%22%23%24%
100-104 g/km24%23%24%25%
105-109 g/km25%24%25%26%
110-114 g/km26%25%26%27%
115-119 g/km27%26%27%28%
120-124 g/km28%27%28%29%
125-129 g/km29%28%29%30%
130-134 g/km30%29%30%31%
135-139 g/km31%30%31%32%
140-144 g/km32%31%32%33%
145-149 g/km33%32%33%34%
150-154 g/km34%34%35%35%
155-159 g/km35%34%35%36%
160-164 g/km36%35%36%37%
165-169 g/km37%36%37%37%
>170 g/km37%37%37%37%

Can I be exempt from company car tax?

It is possible to be exempt from company car tax if the vehicle is only used for business mileage. The scenarios that will result in you being exempt from company car tax are:

  • You use the car for purely business use e.g. travelling to meetings or driving to clients.

Remember: this does not include commuting to and from your place of work.

  • The vehicle is a ‘pool car’ i.e. it’s mostly kept on company premises and used only by employees for business purposes.
  • A company car has been modified to be suitable for an employee who has a disability. In this case it can be used for travelling to and from work but must only be used for business purposes besides this.

How to reduce the amount of company car tax paid

Due to the factors involved in calculating company car tax, you could be hit with an expensive bill at the end of the year. As such, here are three top tips to help you reduce the amount of tax you would potentially need to pay.

1. Consider an electric company car

renault zoe charging

It’s no mistake that the BIK tax system incentivises the use of low-emission vehicles and electric cars. With government targets looming to reduce vehicle pollution, they’re currently advocating the transition to greener personal transport. As a result, given that current rates are at their lowest, it’s more cost-effective to have an EV for a company car. 

For example, a Volkswagen Golf with CO2 emissions of 122g/km would be liable for a 27% BIK tax for 2020-2021. Compared to the Volkswagen e-Golf that is exempt from BIK tax for 2020-2021.

2. Use the car for business purposes only

As we’ve already seen, using your company car for solely business purposes can make you exempt from paying company car tax altogether. While this may be difficult due to lack of a personal vehicle or a long commute, avoiding personal use could save you a lot of money overall.

Remember: There may still be a responsibility to pay for the car’s fuel through a tax benefit.

3. Pay something towards the cost if you can afford it

car cash deposit

As mentioned before, the car’s value affects how much tax you pay, but if you’re seen to be contributing towards the cost of the vehicle then you will see a reduction in the amount of BIK tax you’re charged each month.

The same can be said about added fuel, which is only charged separately when your employer is paying to fill up and the vehicle is doing personal miles, including commuting. However, if you pay for the fuel then you can avoid paying the fuel benefit, which can sometimes be more.

To work out your fuel benefit, multiply the BIK tax rate of the vehicle by the fixed annual fuel charge (£24,500 for the 2020/21 tax year) and by your tax margin. In this example we will use a Volkswagen Golf with a BIK rate of 27%.

Fuel benefit = (27% x £24,500) x 20%
Fuel benefit = £1,323

As you can see from this calculation, you could be charged £1,323 a year for fuel tax. 

So, if you’re not driving nearly enough to quantify this expenditure, you may be best off paying for your own fuel.

How to register a company car

Legally you will have to tell the government the details of the company car which you intend to allow employees or company directors to use, in order for them to charge them the appropriate company car tax.

All the information on how to register a company car with HMRC can be found here, but we’ve laid out the key points for you below.

  • There are different deadlines in place depending on when you provide, change or stop providing a company car to an employee, as shown below.
  • You don’t need to inform HMRC for any of the following reasons:
    • You provide ‘pool cars’.
    • You provide adapted cars for employees with disabilities that are only used privately for commuting to and from work.
    • You provide emergency vehicles for on-call employees of the police, fire and rescue, ambulance or paramedic services.

5 Great cars for low company car tax

While we can’t change what tax bracket you fall under, we can recommend certain models of car for you to consider that, based on the new BIK rates, may be more affordable (prices correct as of time of publishing).

1. Hyundai IONIQ

Hyundai Ioniq

Thanks to CO2 emissions of 83g/km, the Ioniq hybrid is a great choice of company car. As a hybrid it allows you to take advantage of the benefits of being electric with a lower price tag than a pure electric car of its size.

The Facts:

  • Price: From £23,835 / £176.97 + VAT
  • Fuel Type: Petrol hybrid
  • Tax Bracket: As a mid-range emission vehicle, the IONIQ falls into the lower-middle brackets.
    • 2019/20: 22%+
    • 2020/21: 20%+
    • 2021/22: 21%+
    • 2022/23: 22%+

2. Skoda Citigo E IV

Skoda_Citigo-e_iV_at_IAA_2019_IMG_0269 (2)

The Skoda Citigo has joined the electric movement and now comes in a pure electric form – the E IV. This now makes it a zero emission vehicle and a great choice of company car.

The Facts:

  • Price: From £20,455 / £169.53 + VAT
  • Fuel Type: Electric
  • Tax Bracket: As a zero emission vehicle, the Citigo falls into the lowest bracket.
    • 2019/20: 16%
    • 2020/21: 0%
    • 2021/22: 1%
    • 2022/23: 2%

3. Toyota Yaris

Toyota_Yaris_Hybrid

Similar to the Hyundai Ioniq, the Toyota Yaris is another low emission hybrid at 86g/km. However, unlike the Ioniq it comes with an equally low price tag which will further reduce any company car tax.

The Facts:

  • Price: From £15,800 / £153.31 + VAT
  • Fuel Type: Petrol hybrid
  • Tax Bracket: As a mid-range emission vehicle, the Yaris falls into the lower-middle brackets.
    • 2019/20: 22%
    • 2020/21: 20%
    • 2021/22: 21%
    • 2022/23: 22%

4. Vauxhall Corsa-e

Corsa e

The Vauxhall Corsa is already a fan favourite, so it’s quite likely the Corsa-e will be just as popular, especially since it has an impressive range of 209 miles and, thanks to it’s zero emissions, it’s in the lowest tax bracket.

The Facts:

  • Price: From £30,665 / £234.57 + VAT
  • Fuel Type: Electric
  • Tax Bracket: As a zero emission vehicle, the Corsa-e falls into the lowest bracket.
    • 2019/20: 16%
    • 2020/21: 0%
    • 2021/22: 1%
    • 2022/23: 2%

5. Renault Zoe

Renault_Zoe_ZE50_White

Another popular all-electric vehicle is Europe’s top selling electric vehicle – the Renault Zoe. Stylish inside and out the Zoe is a good looking hatch and another example of a zero emission vehicle, meaning it’s in the lowest tax bracket.

The Facts:

  • Price: From £29,195 / £156.45 + VAT
  • Fuel Type: Electric
  • Tax Bracket: As a zero emission vehicle, the Zoe falls into the lowest bracket.
    • 2019/20: 16%
    • 2020/21: 0%
    • 2021/22: 1%
    • 2022/23: 2%

Are you considering leasing your next company car? Then start your search now and compare prices on our latest business special offers.

For more information on company cars, check out our other business car guides.

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