Company car tax is a major financial obligation levied on companies who own, maintain and operate cars owned by their employees. It is also known as benefit in kind (BIK) tax and involves a percentage of each company car’s list price being added to the total taxable income of an employee.
The amount of company car tax owed can vary depending on a number of factors, including the car’s emissions, age, engine size and the level of perks and features contained in the car. However, not all cars are liable for company car tax, and some vehicles are exempt from being included on an employee’s tax return.
According to most tax experts, electric cars are exempt from company car tax – provided they are registered after April 6th 2020. Electric cars running solely on battery power do not emit any exhaust emissions, and as such, HMRC has elected them as being completely exempt from company car tax. This is because the policy of the government is to incentivize the use of electric vehicles in an effort to reduce carbon emissions from road transport.
In addition, vans and commercial vehicles up to a certain value are also exempt from company car tax. The threshold level for these vehicles is currently £12,500, which means that all vans and commercial vehicles with a list price below this figure are also completely exempt from being included on an employee’s tax return.
The situation is slightly different with company cars. The threshold for company cars is set at £40,000, and any car with a list price below this figure is exempt from company car tax. However, cars above the £40,000 mark are liable for company car tax and must be included on an employee’s tax return.
Of course, it is important to note that it is not quite as straightforward as this, as there are other factors to consider. For example, the age and emission levels of a company car will affect the amount of company car tax owing. Cars with extremely low emissions – such as hybrid-electric or petrol-electric vehicles – will attract a different level of company car tax than those with higher emissions.
In addition, the ‘approved-mileage’ scheme must also be taken into consideration, as this will determine the amount of company car tax owed. For example, if an employee travels more than a certain number of miles in their company car per year, then the approved-mileage scheme can be used to reduce the amount of company car tax due.
Cars With High Levels Of CO2 Emissions
Those cars with high levels of exhaust emissions have always attracted the highest levels of company car tax. However, in 2020, the government introduced new rules which are designed to encourage companies to purchase cars with lower emissions, in an effort to reduce carbon emissions from road transport.
Under these new rules, cars with emissions of 130g of CO2 per km or more are now liable to pay a higher rate of company car tax. For example, a car with an emissions rate of 160g of CO2 per km would be liable to pay a higher rate of company car tax than a car with an emissions rate of 130g.
This means that companies which still own cars with high levels of exhaust emissions need to consider making the switch to more environmentally-friendly vehicles in order to reduce their company car tax liability.
For those companies which own cars with emissions of 225g of CO2 per km or more, there is an additional “tilted-scale” of company car tax which will further increase the amount of company car tax owed. This is designed to further incentivise companies to purchase cars with lower emissions.
Of course, the exact amount of company car tax owed will also depend on the amount of perks and features contained in each car, as well as the level of approved mileage for each employee.
Tax Exempt Cars
As mentioned previously, cars with a list price below £40,000 are completely exempt from company car tax, even if they are owned by employees. This means that companies which own cars with a list price below this figure will be exempt from paying any company car tax.
A number of luxury cars also have lower tax rates than many of their more expensive counterparts. For instance, some luxury sports cars can have a lower rate of company car tax than many mid-range models due to their engines being more efficient. This means that luxury cars can often provide a great opportunity for employees to save money on their company car tax.
Employers should also bear in mind that cars owned by staff members can be used as a perk of employment by providing them with additional benefits, such as a private chauffeur service or discounts on travel costs. By taking advantage of these opportunities, employers can reduce the amount of company car tax owed on these cars.
Finally, some cars are eligible for reduced company car tax due to their ‘green’ status. For example, cars running on biofuels such as biodiesel and hydrogen fuel cells are exempt from company car tax, as are cars running on alternative fuels such as natural gas or ethanol.
Options To Reduce The Company Car Tax Burden
Most companies will want to reduce the amount of company car tax owed on their fleet of company cars in order to reduce their overall financial burden. Fortunately, there are a number of options available to companies who wish to reduce their company car tax liability.
Firstly, companies could consider replacing any cars with emissions of 130g of CO2 per km with more environmentally-friendly models. This would help to reduce the amount of company car tax owed by the company.
Secondly, companies could consider taking advantage of the various government incentives available for purchasing electric or hybrid vehicles, as these cars are eligible for generous company car tax allowances.
Another option is for companies to offer approved-mileage incentives to employees, as this will help to reduce the amount of company car tax owed by the company. Companies could also consider purchasing company cars with lower emissions in order to reduce their company car tax liability.
Effect Of Company Car Tax On Fleet Budgets & Car Choice
The introduction of the company car tax has had a major impact on the way companies manage their fleets of company cars. Companies now have to carefully consider their car choice when buying cars for their employees, as the company car tax can have a significant effect on their fleet budget.
Many companies now opt for cars with lower emissions and list prices, as these will attract a lower rate of company car tax. This enables companies to make the most of their budget and help to reduce significantly the amount of company car tax owed.
Companies are also learning the value of leasing their company cars, as this provides a further opportunity for companies to reduce their company car tax liabilities. Leasing allows companies to spread the cost of their cars over a long period, thus reducing the upfront cost of the car and the amount of company car tax owed.
Companies are also increasingly opting for electric cars, as they are exempt from company car tax, meaning that companies can reduce their overall financial burden. This is a growing trend, as more companies are recognising the environmental and financial benefits of using electric vehicles.
Company Car Tax On Employees
The company car tax also has an impact on employees too – as any company car owned by an employee must be declared as a benefit in kind (BIK) when the employee files his or her tax return. This means that employees have to pay tax on the value of their company car each year, and this tax can be a significant burden for many employees.
It is important to bear in mind that the company car tax affects every company differently, and as such, companies need to be aware of the amount of company car tax owed on each of their company cars. Companies should also consult a tax advisor in order to ensure that they are taking advantage of all available options to reduce their company car tax liabilities.
In addition, employees should also be aware of the potential tax implications of owning a company car, as this can be a significant burden for many employees. Employees should make sure that they are fully aware of the amount of company car tax owed on their vehicle and should discuss any concerns with their employer or tax advisor.
Implications Of Company Car Tax
It is clear that the company car tax has had a major impact on the way that companies manage their fleets of company cars. Companies now have to weigh up the cost of owning and operating a car against the amount of company car tax that they will be liable for.
The company car tax also has far-reaching implications for employees, as they will have to pay tax on the value of their company car each year. This can be a significant burden for many employees, and as such, it is important for them to ensure that they are taking full advantage of any available options to reduce their company car tax liability.
Overall, the introduction of the company car tax has changed the way that companies manage their fleets and has had a major financial impact on employees. Companies and employees alike should ensure that they are aware of their company car tax liabilities and should consult with a tax advisor in order to ensure that they are making the most of any available options for reducing their company car tax liabilities.
