Company car tax guide 2016: all you need to know

Used BMW 3 Series
4 Apr, 2016 10:00am Tom Goodlad

Don't be confused by company car tax rates - our guide to the rules is here to help

Company cars are a great perk, but company car tax rates can be confusing. That’s because the amount deducted from your payslip every month or week isn’t based simply on CO2 emissions – like VED car tax.

Your company car’s CO2 tailpipe emissions are an important element, but your tax calculation is also based on the car’s official list price, the value of optional extras, what type of fuel it uses, and even how and when the car is paid for and used.

But once you’ve figured out the basics it’s pretty simple to understand the numbers. Our easy to follow guide is here to help!

What is company car tax? 

If a company car is supplied as part of your employment, and if you are able to use it for personal transport outside of work, then it becomes a taxable perk.

In official terminology your company car is a ‘Benefit In Kind’ (BIK), because your private use of the car has an actual monetary value. Her Majesty’s Revenue and Customs view that BIK as an addition to your income, because it is effectively paid for by your employer on top of your annual salary.

As with all earned income, you have to pay tax on it. One of the easiest ways to work out how much, is by visiting the HMRC website and looking at their company car tax calculator and help-sheet sections.

Best company car for your budget 

The starting point for working out the tax rate for the car you choose to run is its carbon dioxide (CO2) emissions, as different emission level bands are taxed different percentages of a vehicle’s P11D value. This value is the HMRC-recognised list price of the car including options added to the vehicle but without non-taxable items, which include the first year’s road tax and original registration fee.

If the car costs less to buy than the official P11D value it won't save you tax, as HMRC still says the BIK value is the same. The BIK value is reduced, though, if you have the car part-time or if you pay something towards its cost in the first place – so your company car tax charge should reduce too. 

It’s important to note that company car tax bands are not the same as normal Vehicle Excise Duty car tax bands. In terms of BIK company car tax bands based on emissions, there are currently thirty different levels.

How is a car’s company car tax rate determined? 

The least polluting company car models earn a five per cent BIK rate, while the highest polluters are taxed at 35 per cent. As the tax year changes, rates will change, too. So, from April 2016, electric vehicles (EVs) and ultra low-emissions vehicles - which were once exempt - will face a seven or 10 per cent BIK rate. To make things a bit easier, we’ve included a company car tax band table at the bottom of this page. This is for the 2016/2017 financial year after which the bands shift again.

Audi A4 Ultra front tracking

Company car tax: petrol vs diesel 

Diesels currently have a three per cent surcharge over petrol models with similar emissions because they emit greater amounts of harmful particulates, so if you’re choosing between petrol and diesel for your next company car, you’ll need to work out whether or not you cover enough miles in a year to cover the extra cost of a diesel company car in the first place.

How much company car tax will I pay?

The amount of company car tax you actually pay is dependent on your annual salary. For example, if you fall into the twenty per cent income tax bracket, you’ll pay twenty per cent of the taxable portion of the car’s P11D value. Those in the forty per cent tax bracket, meanwhile, pay forty per cent on the taxable chunk of the P11D. This will usually be deducted from your monthly pay packet. 

Company car tax calculator example 

Here’s how to calculate your company car tax in three simple steps – 

1)   Take your company car’s P11D value (for example £15,000)

2)   Multiply this value by the car’s company car tax rate which is dependent on CO2 emissions (for example 15%) to get your BIK amount

3)   Multiply this BIK value by your personal tax rate - 20%, 40% or 50% - (for example 20%). This will be the amount of company car tax payable.

£15,000 x 15% = £2,250 (BIK amount) x 20% = £450 per year

Mazda 6

Company car tax jargon buster 

If all the terms and jargon associated with company car tax are a bit confusing, we’ve put together a quick glossary to help you understand all the important bits…

Benefit in Kind (BIK) - Benefits that are not included in an individual’s salary, one of which is the company car

Her Majesty’s Revenue & Customs (HMRC) – The UK’s tax authority 

P11D – form that must be completed by an employer every year and sent to HMRC 

P11D value – Total value of the car including RRP, VAT and any extras such as metallic paint, sat nav or parking sensors. 

Recommended Retail Price (RRP) – This is the amount that the car manufacturer recommends that the car should be sold for. 

Vehicle Excise Duty (VED) – amount payable on all cars, including company cars, that is calculated based on CO2 emissions of the car 

Company car tax bands 2016/2017:  

CO2 emissions (g/km) 2015/2016 BIK rate (%) - Petrol 2015/2016 BIK rate (%) - Diesel
0 to 50 (inc. EVs) 7 10
51-75 11 14
76-94 15 18
95-99 16 19
100-104 17 20
105-109 18 21
110-114 19 22
115-119 20 23
120-124 21 24
125-129 22 25
130-134 23 26
135-139 24 27
140-144 25 28
145-149 26 29
150-154 27 30
155-159 28 31
160-164 29 32
165-169 30 33
170-174 31 34
175-179 32 35
180-184 33 36
185-189 34 37
190-194 35 37
195-199 36 37
200-204 37 37
205-209 37 37
210-214 37 37
215-219 37 37
220+ 37 37
For more breaking car news and reviews, subscribe to Auto Express - available as a weekly magazine and on your iPad. We'll give you 6 issues for £1 and a free gift!