Tax Guide on Company Cars
Company car tax, also known as benefit-in-kind tax, is a tax that applies to anyone that uses a company car for personal reasons. For example, if you were to use a company car to go on vacation, you will be imposed company car tax. Unfortunately, although sounding simple, company car tax can be pretty complicated if you are unaware of what it is all about, let alone understand how much you are being taxed.
That said, to help you understand more thoroughly about company car tax, here's a short and quick guide to give you what you need to know about it:
1. Calculating the Amount
First things first, let us talk about how you can calculate the company car tax amount.
Company car tax is based on a few factors: the CO2 emitted, the car's value, your income tax band, and the BIK band of the vehicle. It also considers the P11D value of the company car, which is a list price of the vehicle excluding manufacturer discounts, grants, first-year registration fees, and the like.
With that, to calculate the actual company car tax for that year, you get the BIK band value of the vehicle and multiply it with your income tax band. After that, you divide the amount by twelve, giving you the monthly tax costs imposed on you through company car tax.
2. Discounts and Extra Costs
When talking about costs, you'll naturally wonder if there is anything you can do to reduce the tax you are imposed with. Generally, there are, but this usually applies only to electric and hybrid cars. This is because the BIK rates for many electric vehicles was at 0%. Recently, however, it has increased by one per cent. However, if you have an electric car, you wouldn’t need to worry about RDE2.
A surcharge of 4% will be applied on cars that do not meet the Euro 6D Emissions Standards, also known as the RDE2 compliance. This surcharge is added onto the BIK band, which means that if your car initially fell into the 25% band, it will now be pushed up to 29%.
Fortunately, if you bought a new car recently, you don't have to worry about the surcharge. This is because vehicles manufactured past 1 January 2021 are built to meet the RDE2 requirement. If you have an older car, though, you will need to check if your car complies with RDE2.
3. Salary Sacrifice vs Cash Alternatives
Now, when paying for the tax, you generally have two options: salary sacrifices or cash alternatives.
With salary sacrifice, you sacrifice a portion of your pre-tax salary to pay for the car. However, note that a salary sacrifice car may still be eligible for the company car tax. The amount you will be taxed will generally depend on which one is bigger: the income tax due on the salary sacrificed or the company car tax on the car.
On the other hand, cash alternatives mean you will be taxed on the benefit you receive. This means that even if you receive extra money while also taking the company car, you will be taxed for the full amount.
As you can see, company car tax can be a little confusing at times. This makes figuring out how much company car tax you will be imposed a little challenging. Regardless, understand the number is essential, as it is a cost that will still affect your financials. Plus, you want to get the amount right. Otherwise, you might find yourself in trouble. That being said, if you still can't figure out how to manage company car tax, we highly recommend reaching out to accountants to help you out. They can help calculate your company car tax for you, making sure you are paying the correct amount every time.
1 to 1 Accountants is an accountancy firm in the UK, serving small businesses and freelancers to help them stay on top of their finances. If you are looking for accounting assistance to manage your taxes, reach out to us today!