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If you're wanting to find out more about leasing a car for your business, or to learn about the process, Leasing Options' comprehensive guides have everything you need to know.
How Does Company Car Tax Work?
If you're considering business car leasing, it's helpful to learn about the tax benefits and implications for your company and employees.
If a lease car is used for business and personal reasons, company car tax or Benefit in Kind (BIK) tax is payable and is calculated based on the vehicle's value, emissions and an employee's earnings/tax rate.
To learn more about how BIK tax affects company car use, our guide details the fundamentals of this tax.
What is the benefit in kind?
Benefit in kind is classed as benefits an employee or director receives from a company or employer, which are separate from wages.
The most common benefit in kind is a company car, as this type of perk can be personally used by employees, but the company has paid for the initial access to it. Other benefit-in-kind perks include healthcare and childcare vouchers, among others.
If you are supplied with a benefit in kind, tax is payable, which is known as the benefit in kind tax. The rates vary depending on the perk, but this amount is payable through an employee’s wages, and companies pay through National Insurance contributions.
What tax do I pay on my company car?
If you're lucky enough to be supplied with a company car, then you could be liable to pay a charge known as BIK tax if used for personal driving. The amount you're required to pay will depend on three things:
- Price of your vehicle (P11D value)
- Your annual earnings/tax rate
- CO2 emissions of the vehicle
As with all taxes, the rules are subject to change, so it's vital to check with HMRC on the different BIK rates and values according to recent updates.
Are BIK and company car tax the same thing?
Previously, if employees were provided with a company car, company car tax would apply to this perk. However, the company car tax now falls under the umbrella of BIK tax and has specific rules regarding the tax implications for employees.
Essentially, they are the same thing now, and the amount you must pay depends on the vehicle you drive.
Who pays company car tax?
Company car tax or benefit-in-kind tax is paid by anyone that uses a business lease car for personal use, including commuting. Tax is paid on the value of the car and can depend on things such as whether you have the vehicle part or full-time and if you paid anything towards it.
People eligible for company cars include:
- Directors/business owners
The above individuals can also work for various organisations such as:
- Limited Companies (Ltd)
- Public Limited Companies (PLC)
- Limited Liability Partnerships (LLP)
- Local authorities
How much is benefit in kind?
Benefit in kind tax varies depending on a number of factors regarding the type of business lease vehicle you have. It also depends on your personal tax bracket, and this is recorded in a P11D, which the HMRC use to calculate the tax payable.
How is BIK tax calculated?
The benefit-in-kind amount takes into consideration a number of elements, including:
- The list price of the car
- Age of the car
- Fuel type
- CO2 emissions
- Engine size
- Personal tax bracket
Working out what you will pay can be confusing, but the simplest way to get an accurate answer is by using the HMRC's company car and car fuel benefit calculator. There's also advice on how to complete each section to ensure you get the correct result.
An important factor to be aware of is the current BIK rates. These change according to the announcements in the Chancellors' budget. However, they are currently fixed until 2024-25.
|CO2 (g/km)||Electric range (miles)||2022-23 (%)||2023/24 (%)||2024/25 (%)||2025/26 (%)|
* The rates above apply to vehicles registered after April 2021.
For more information on Benefit in Kind rates and company car benefits and expenses, visit gov.uk.
What is BIK tax on vans?
Tax on your van depends on whether you use it purely for business or both business and personal reasons.
If you are an employee and regularly use your van for private use, then you must pay benefit in kind tax.
Vans currently have a flat rate of BIK, which is £3,600. If your company also pays for your fuel, usually with a fuel card, there is an additional BIK standard value of £688. Zero emission vans pay 0% of the rate, meaning the calculation is £0.
If an employee uses the van for private usage but not all the time, there are some ways to reduce this standard value, such as:
- The employee cannot use the van for 30 days in a row
- The employee pays you to privately use the van
- Other employees use the van – in this case, divide £3,600 by the number of employees
How do I pay tax on benefits-in-kind?
If you are an employee of a company that uses a business lease vehicle, the tax you pay on this benefit is taken from your wages. Your employer works out what is owed, and this is automatically deducted via Pay As You Earn (PAYE).
To determine how much you owe in tax, your employer will submit a P11D to HMRC, so you do not have to worry about filing any additional paperwork when getting a company car.
How to reduce benefit in kind rate
The amount of tax you pay on your company car depends on a number of factors, and these factors can help reduce the tax charge.
To help you save on company car tax, consider the following:
A cheaper vehicle – Opt for a car at a lower price, as this is taken into account in the calculation
Switch to an electric vehicle – While EVs are generally more expensive than diesel and petrol cars, they have very low BIK rates, which helps to lower tax charges. For more information, check our guide to the benefits of business EVs
Use solely for business purposes – Switching the usage to business travel only means you don't have to pay BIK
Avoid adding extras – While adding larger alloys or car mats to your vehicle might be tempting, these costs all add up and increase the vehicle's P11D value
Opt for a pickup truck – Some pickups (depending on payload) are classed as light commercial vehicles, and they come under van BIK standard value rates. So, you could save yourself money but still have a useable car for private journeys
Do I pay tax on fuel?
In most cases, employees drive company cars and pay for fuel themselves for private journeys. However, sometimes employers provide what the HMRC classes as &pos;free fuel' that can be used for business and personal travel.
If your employer pays for your fuel, this is subject to tax as it's a benefit. This is calculated with a fuel charge multiplier. The additional cost is something to consider as if you're not clocking up the miles, you could end up paying more in tax than you actually spend on fuel.
Company car tax rules and benefits
The rules surrounding company car tax benefits can be confusing. So to understand the best options for your company, it's helpful to speak with a tax specialist to take full advantage of any ways to save on BIK costs.
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