HMRC has introduced a generous company car tax scheme, to encourage small business owners to do more for the environment. They reward the use of vehicles which emit a reduced amount of CO2. However, this scheme only concerns company cars.
Purchasing a company car (or van) is a big investment for any business. Luckily many that are looking into purchasing, or using a current vehicle, as a company car means that their mileage is high and that their out goings on tax and fuel is slowly becoming a bit more costly. So claiming a vehicle as a company expense may be the right step for them.
Company cars are provided by businesses, to employees who need to commute to other locations. They can be used for both business and personal use, however this can be seen as a downside.
Benefits in kind
Using the car on a personal basis turns it into a taxable asset, or more commonly known as a benefit in kind, in the eyes of HMRC.
Benefits in kind are benefits which are received from their employment but are not included as part of their salary.
Examples of these include company cars, cheap loans, and private medical insurance paid for by the employer.
Where benefits in kind are taxable, tax is paid on the cash value, or taxable value. This equals the cost to the employer of providing you with the benefit.
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Calculating your benefit in kind tax
The benefit in kind rate which HMRC applies to your car is a percentage of its P11D price, based on its CO2 emissions. The lower the emissions, the lower the rate charged.
To calculate the rate of tax you will be charged, there are a couple of simple steps to follow:
- Multiply the car’s P11D value by the percentage that applies to its CO2 emissions.
- Multiply this amount by your income tax band, this will be either 20% or 40%.
- You will be left with a final calculation; this is the amount of tax you will pay on your benefit in kind.
We have included a more detailed example of the benefit in kind rate on our company cars page.
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