HMRC company car tax: What you need to know 

If you have a company car or are considering getting one, it's important to understand the tax implications. Company car tax in the UK is a complex topic, but we've got you covered with the basics.

If you use the company car for any private purposes, including commuting, you will have to pay tax on it.

The main things that go into determining your tax liability on a company car are:

• The CO₂ emissions of the vehicle
• The list price of the car, including optional extras
• How much of the car’s acquisition cost you pay yourself
• How much of the year the car is available to you
• Your income tax bracket

How does company car tax work?

In short, a company car is considered to be a benefit in kind (BiK). BiK are benefits that are not included directly in your salary but are still treated as taxable income. This means that the tax on your company car will usually be deducted from your paycheck and paid through PAYE (Pay As You Earn).

Of course, you will not have to pay tax on the entire price of the company car, and this is where the multitude of factors above come into play.

This article will first cover each of these factors in more depth to explain how company car tax works, and then provide you with an example of how to calculate it.

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How much tax will I pay for a company car?

How much tax you will pay for a company car predominantly depends on the CO₂ emissions and the list price of the car.

Here is the gist of how company car tax is calculated:

List price of car * rate based on emissions * days/year the car is available * your tax bracket

Easy, right? Of course it isn’t, but stay with us, because we will explain it all and provide you with a few examples.

BiK rates - how do CO₂ emissions affect my company car tax?

The most important factor when determining your company car tax is the CO₂ emissions of the car in question. The more CO₂ emissions a car produces, the higher the tax will be. This is sometimes referred to as the BiK rate of the company car.

HMRC has made a table with 18 bands to classify cars for taxation based on their CO₂ emissions. See the HMRC emissions table here.

In the table, we can see that, as of 2023, the BiK rates vary between 2% and 37%. This means that if you get a 0-emissions car, such as an electric one, you will end up paying a whole lot less than you would with a gas guzzler.

If you're looking to save money on HMRC company car tax, it is definitely worthwhile to consider a vehicle with low emissions.

Electric and hybrid cars are good options, as they generally have lower emissions than petrol or diesel cars.

How expensive is the car, and what do you cover yourself?

As mentioned, company cars are considered a benefit. Therefore the list price of the car, which is what it cost when it was first registered, including extras, and how much (if any) you yourself paid towards it are factors when determining your tax liability.

Purchase price

The payment you make when you get the car reduces your tax liability every year going forward, as long as you have the car.

Fuel

Fuel is separate from your company car tax, but is treated by the same logic. It is a taxable benefit if your employer pays for fuel you use for private trips, including commuting.

It is not uncommon that employees have an agreement with their employer, which stipulates that the employee pays an amount towards the private use of the company car. This is also factored into your tax liability, and can actually reduce it to 0.

How much you pay your employer for your private usage of the car is often based on a mileage logbook that can help determine how your mileage is split between business and private travel. We recommend our Driversnote mileage logbook. The automated trip tracking and easy categorisation make it the ideal tool for the purpose.

Are there period periods during the year when the car is unavailable to you?

You will not have to pay taxes for having a company car in periods when you didn’t have one. This is not done on a day-by-day basis, though.

HMRC has 3 criteria for which days count as days when the car was unavailable to you:

• Any day before the first day on which the car is available to you.
• Any day after the last day on which the car is available to you.
• Any day within a period of 30 or more consecutive days throughout which the car is not available to you.

How to calculate your company car tax

Once you have these figures, you can use the HMRC company car tax calculator to work out how much tax you'll need to pay.

In all honesty, the HMRC calculator is in dire need of an overhaul. We’re considering making a better one ourselves. But for now, we will have to make do with what we’ve got.

Below we will do the calculations to provide some clarity on how to go about it.

Example of how company car tax is calculated

There are 7 things to consider for the calculations, although you might be able to skip some of them depending on your circumstances.

Source: HMRC

Let’s begin.

Let’s say you want to get a Tesla Y as a company car. First, we will list the relevant information we need for the calculations, and then do the math.

Let’s do some math! 

In this example, your yearly tax liability would come out to just £40.2.

As a side note, because the BiK rate is so low on electric cars, your own down payment doesn’t influence your tax liability as much as it would for a car with a BiK rate of, say, 30%.

In this case, you would pay £54.8 per year if your employer had covered the full £53,000 price of the car.

We won’t bother you with another table, but we want to make clear how much emissions impact your company car tax.

If we do the exact same math as above, but with a Nissan Qashqai with a list price of £40,000 and CO₂ emissions of 143 g per km (BiK rate of 31%), your tax would come out to  £1,481, even with your own contributions towards the car being the same as with the electric one.

To summarise

We hope that this has given you an overview of how HMRC company car tax works.

Company car tax can be a complex topic, but with the right information, you can make an informed decision. Remember to consider the CO₂ emissions and the list price of the car thoroughly when choosing a company car, as these are the main factors when calculating the tax on it.

With the right car and tax planning, you can reduce your tax bill and enjoy the benefits of a company car.

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