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Company Car Tax Explained
When it comes to Business Leasing, one of the main considerations for Business Owners and Fleet Managers, as well as the driver of the vehicle, is Company Car Tax, a tax based on a car's emissions and on a percentage of the vehicle's official price (P11D value - which includes all optional equipment), fuel type, how the car is paid for the car and when the car is used.
The fact that that percentage is primarily determined by the vehicle's CO2 emissions has led to a rise in the number of low-emission vehicles being leased and sold, as well as a significant increase in the number of diesel cars in the UK. This goes to show that some tax considerations work as, according to Next Green Car:
"Company car tax is designed to encourage employers and company car drivers to choose cars with lower levels of CO2 emissions; incentives are offered both to the company and to the recipient of the vehicle to select low emission vehicles."
But just what is Company Car Tax?
Here is our easy-to-digest guide to what is considered by the Tax Office, the Government and the Company as a Benefit to the Driver; and what it means to the Company too.
How is Company Car Tax calculated?
Under the current system, the actual tax on a company car is based on a percentage of the official price of the car (called the 'P11D'), with the CO2 emissions of that car determining the actual percentage; and for the employee of the Company (who will be driving the car) the fact that they get all the benefits of the use of a car without paying for it is considered to be a Benefit-in-Kind (BIK), which is taxed at the personal tax rate for that person, and usually collected via the PAYE system in wages.
"The company car tax payable by an employee is based on the vehicle's P11D value multiplied by the appropriate BIK rate (determined by the car's CO2 and fuel type) and the employee's income tax rate (basic rate of 20%, higher rate of 40% or additional rate of 45%)."
For example: If a car's P11D value is £15,000, multiply this by the tax rate applicable to its CO2 emissions (e.g. 15%) to get a BIK amount of £2,250. Then this gets multiplied by your personal tax rate (normally 20%) to get a payable yearly tax of £450.
What are the BIK Rates?
Alongside vehicle taxes such as Vehicle Excise Duty or 'car tax', BIK Rates are important to the driver of the vehicle, and being primarily CO2-based, these extra costs to the companies and their drivers has actually led to a significant increase in the number of diesel cars in the UK, as well as the development of an electric car culture in the fleet and company use world.
BIK rates are set by the Chancellor in Budgets, and in the 2015 Budget, the following rates were announced to be in place from April 2015 until March 2020.
- Company car BIK rates in 2015 for conventional petrol cars start at 13% with the rate increasing in 1% increments with increasing CO2 up to a maximum of 37%
- For conventional diesel vehicles, the Company BIK rate is 16%, again increasing in 1% increments with increasing CO2 up to a maximum of 37%. The reason for the 3% discrepancy between petrol and diesel rates is because diesel vehicles have greater emissions of local pollutants such as NOx.
- For hybrid company cars, because of their lower CO2 emissions, BIK rates are reduced by at least 5%. And for diesel hybrid powered cars, the 3% diesel surcharge does not apply.
- Ultra Low Carbon Vehicles (ULEVs) with plug-in hybrids are rated at 5% or 9% (depending on official CO2 emissions.)
- Battery electric cars are rated at 5%.
Costs and Benefits to the Employer
Because BIK is, as the phrase suggests, a benefit to the employee, the employer is liable to pay Class 1A National Insurance Contributions (NICs) to reflect this, with the Class 1 NICs based on the vehicle's P11D value and relevant BIK rate which is determined by the official CO2 emissions and fuel type.
There is also the cost of Capital Expenditure to be considered, with most cars "to use standard capital allowances, while some brand-new Ultra Low Emission Vehicles are eligible for a 100% first-year write down as part of the Enhanced Capital Allowance scheme."
If you are a Business looking at leasing vehicles, take a look at our Business Leasing section here.
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