Tax and the company car

Legal Information

Whilst all the legislation and jargon that surround company car ownership and purchase may seem daunting, there is no need to worry. Whilst the requirements of each business and driver may differ, we'll give you a basic understanding of all the issues that will influence your decision.

THE COMPANY CAR DRIVER

A company car driver will probably have a list of cars from which he will have to select a model that will suit his particular needs. He will then need to consider the taxation implication of his choice.

The factors which will determine the benefit in kind charge (i.e. tax paid) the company car driver will pay are List Price, CO2 emissions, and the level of income tax the driver pays – basic or higher rate. We will consider each of these in turn.

List Price

List Price (also known as P11d price) is the starting point for working out the tax to be paid. Whether the car is purchased at full price, or the purchaser secured a massive discount on the price, the benefit in kind will be calculated on the full list price of the car, including all fitted options and extras. For tax calculation purposes, the Vehicle Excise Duty and First Registration Fee are deducted from the ‘On the road price'.

Carbon Dioxide Emission Level (CO2)

The next item to consider is the published level of CO2 emissions of the chosen car. The lower the level of CO2 emissions, the lower the percentage will be applied to the list price to determine the benefit in kind.

Income Tax Rate

The final factor to consider is the rate at which the company car driver pays tax - 20%, 40% or 45%. For 2014 - 2015, the income tax thresholds thresholds are :

Basic Rate 20% Salary of £0 to £31,865
Higher Rate 40% Salary of £31,866 to £150,000
Additional Rate 45% Salary of £150,000 +

Example

Let's consider the Volvo V40 D2 ES :

List Price Less First Registration Fee and Excise Duty (0 on this particular car) = £20,795 - £55 £20,740
CO2 Emissions rate (88g/km) 14%
Cash Equivalent (Amount upon which tax is paid) (£20,740 x 14%) £2,903.60
Benefit in Kind Tax For Taxpayer @ 20% (£2,903.60 x 20%) £580.72 per year (or £48.39 per month)
Benefit in Kind Tax For Taxpayer @ 40% (£2,903.60 x 40%) £1,161.44 per year (or £96.79 per month)
Benefit in Kind Tax For Taxpayer @ 45% (£2,903.60 x 45%) £1303.62 per year (or 108.89 per month)

The other issue facing the company car driver is whether or not he receives fuel for private from the employer. If he does, then this is also a benefit in kind, upon which the company car driver will pay tax. This benefit in kind, and the subsequent tax to be paid is quite easy to calculate. For tax year 2014-15, simply take £21,700, multiply it by the CO2 percentage of the car, and apply the appropriate tax rate.

For our Volvo V40 D2 ES :

Value of Fuel Benefit £21,700
CO2 Percentage 14%
Cash equivalent of benefit £3,038
Benefit in Kind Tax For Taxpayer @ 20% (£3,038 x 20%) £607.60 per year (or £50.63 per month)
Benefit in Kind Tax For Taxpayer @ 40% (£3,038 x 20%) £1215.20 per year (or £101.27 per month)
Benefit in Kind Tax For Taxpayer @ 45% (£3,038 x 20%) £1367.10 per year (or £113.93 per month)

 So, in this example, a basic rate tax payer with a Volvo V40 D2 ES as a company car and using fuel for private purposes would pay £48.39 plus £50.63 = £99.02 for the benefit of the company car. In normal circumstances, the employee's tax code would be changed to reflect this benefit, and the tax would be deducted from the employee's salary on a monthly basis through the Paye As You Earn system.