Drivers who have use of a company car are required by the government to pay tax on this benefit. The calculations surrounding this are complicated and not always easy to understand, so this post is designed to explain each section of the calculation and expose areas where savings can be made.
The first thing needed in the calculation is the price of the vehicle, or its ‘P11D’ value. P11D is the internal code given by HM Revenue and Customs (HMRC) for the form employers have to fill out every year to declare the value of taxable benefits. In terms of a benefit such as a company car, this value is the retail price of a vehicle including all optional extras and delivery charges but excluding road tax and first registration fee.
However, when evaluated from both financial and environmental perspectives, there is a difference between the taxable value of a car and its actual cost. In order to quantify this, factors such as the fuel type and level of emissions now have a bearing on how much a person is charged for the privilege of having a company car. This is called its Benefit In Kind or ‘BIK’ rate.
Under the current system, Benefit In Kind is primarily calculated from a car’s CO2 output. The level of its CO2 emissions dictates its tax bracket, which, in turn, applies a taxable BIK percentage on the P11D value. The higher the CO2 output, the higher the tax rate percentage.
The government has published escalating BIK rates to 2019, and for the remainder of this 2014-2015 financial year the starting rate for petrol cars is five per cent. Until April 2016, diesel vehicles pay an additional three per cent surcharge over petrol up to a maximum of 35 per cent this year and 37 per cent next financial year. Battery-powered electric vehicles currently attract a zero BIK rating.
The final modifier applied to company car tax relates to the income tax bracket of the person that will be using the company car. Income tax begins at the basic rate of 20 per cent for people earning up to £31,865, rises to 40 per cent for those earning £31,866 to £150,000, and then escalates to 45 per cent for those earning more than £150,000 per year.
The income tax percentage is applied to the BIK rate of the vehicle to calculate the annual monetary cost to the user. This figure is divided by 12 and deducted from your monthly salary.
HOW CAN I WORK OUT MY TAXABLE RATE?
Here is the official calculation:
Annual tax to pay = (P11D price multiplied by BIK percentage) multiplied by the driver’s income tax rate.
If that still looks like too much effort, Lexus has provided an extremely helpful company car tax calculator that does all the hard work for you. It even allows you to compare the cost between any Lexus model and cars from other manufacturers. Follow this link to the tool on the official website. Alternatively, why not try this official app from Toyota and Lexus Fleet Services available on the Apple Store.
HOW CAN I REDUCE THE COST OF HAVING A COMPANY CAR?
While you may think that the simplest way is to choose a cheaper vehicle, it’s important to remember that taxable rates are also based on emissions. Monthly costs can be significantly reduced by choosing a cleaner, more environmentally-friendly vehicle, such as a petrol hybrid. A diesel vehicle with the same list price and CO2 emissions as a petrol will cost you more as it has a three per cent higher BIK rate.
In the eyes of HMRC, company cars are restricted to business use only, which means that mileage accumulated in non-work-related activities, including commuting and leisure travel, has to be repaid on a pence-per-mile basis. Savings can therefore be made by minimising vehicle use outside of work hours.
Think carefully before adding optional extras, which will increase the P11D value. Instead, think about upgrading to a higher specification car from the outset, as it may feature the equipment you need at a price that is actually less than the cost of it being added as an option.
Finally, it is possible to reduce a car’s taxable value by making a personal contribution to defray the cost. This can be done as either a lump sum or by monthly instalments up to a total of £5,000.