Company car tax

Introduction 

Let’s compare company car tax versus claiming for a mileage allowance for using your own private car for business journeys.

First of all, how do both scenarios compare in terms of tax savings? In addition, what are the taxes that are payable?

Indeed, when you run a company car through your own business, there are both advantages and disadvantages. As a result of this, the tax savings and costs will depend on the type of vehicle that you are using and how many miles you travel in the vehicle. Key to note, your contractor accountant will be able to help you work out the tax position.

We have also written about using a bicycle or motorcycle for work journeys. This looks at the considerations between company owned and privately owned bike. Kindly note, this is a good read, if you are considering using this method of travel.

Initial considerations   

Please note, in most cases, UK contractors will travel to work each day by car. However, since the pandemic, some will now spend more time working from home.

In most cases, the journeys by contractors who travel to work by car will consist of visiting their main client site(s). Furthermore, business journeys by car could include:

  • Visits to other work-related sites.
  • To attend training sessions.
  • Attend conferences and seminars.

When you use your car for business reasons, it can be confusing to know what you can claim for. Therefore, this article will aim to make this clearer for you.

Important to note, if you are a sole trader, there is no actual concept of a company car. Indeed, this is because you and your business are the same legal entity. In contrast, when you have your own company, both you and your company are two separate legal entities. Therefore, when you have your own company, it can own a vehicle and provide this to you as the employee of your company.

Mileage rates     

For sole traders     

Please note, sole traders have a choice of two methods. As a sole trader, you will be able to work out what you can claim for mileage, when you use your own car for your work journeys:

  • The first option is the `mileage method.’ To clarify, you can use this method on the basis that you have never claimed for capital allowances on your car. Please note, this method works by gathering together the total business mileage, travelled during the tax year. As a result of doing this, you can then convert it into mileage allowances by claiming at the HM Revenue & Customs’ (HMRC) approved mileage rates. Key to note, 45 pence per mile is claimable for the first 10,000 miles travelled in the tax year (6 April to 5 April). After this, 25 pence can then be claimed for each mile thereafter; or
  • The second choice is the `actual cost method.’ What’s more, this way of working out what you can claim, takes the total business mileage and compares it against the total overall mileage. Once you have done this, you can then calculate a percentage of the total miles that relate to your business journeys. Next, you can then take this percentage and apply it against the total cost of all of your car’s various running costs. As a result, you can then calculate the proportion of your car running costs that you can claim as a business expense.

To sum up, whichever choice you make from the above, your claim will reduce your taxable profits. As a result, this will also reduce the amount of tax and NI that you pay on these.

For contractors     

Firstly, most contractors will tend to work via their own company or perhaps via an umbrella company.

When you do use your private vehicle to travel to work in, you can claim for mileage allowances. Furthermore, you will claim for these under HMRC’s approved mileage rates.

Please take note, as above, the rates that you can claim are 45 pence for the first 10,000 miles travelled in the tax year. After this, the rate is 25 pence per mile for each mile. Key to note, these rates intend to compensate the employee for the overall car running costs that they incur. This will include fuel, repairs and maintenance, road tax, and insurance. Therefore, if you are running your own company and you are using your private vehicle for business, your company can reimburse your mileage at the above rates, and in turn this will save tax.

As a side note, there are a couple of other car-related costs that you can claim for, if you are using your private car for business journeys. These are:

  • Parking fees.
  • Road tolls.

To sum up, when you use your private car for business journeys, the company will save Corporation Tax (CT) at 19% on the sum of the mileage, parking fees and any road tolls.

Company car tax v private car -considerations     

A company car   

You may be considering arranging for your company to provide you with a company car. When you do, the company will save CT on the various car running costs. Please note, although depreciation on the actual vehicle cost is claimed for in the accounts, the company will actually save CT on the car cost by way of Capital Allowances. These, in turn, are applied in the company’s CT computations.

If the company allows you to use the car for private journeys, there are Benefits in Kind (BIK) that come along with this. Importantly, The BIK are what result in company car tax. Therefore, the BIK is calculated on:

  • The car’s co2 emissions when it is a normal petrol or diesel car, and most hybrid cars. Once the co2 emissions are known, you can work out the percentage rate that applies. This, in turn, is applied to the car’s list price to calculate the BIK.
  • The car’s electrical range, if it is an electric car. Once the electrical range is known, you can work out the percentage rate that applies. This, in turn is applied to the car’s list price to calculate the BIK.

Taxes

As the director / employee who is provided with the company car, you will pay tax on the benefit via your tax code, that is applied to your salary. Meanwhile, the employer will pay National Insurance on the benefit. Therefore, how can you work out the amount of company car tax?

  • BIK is taxable on the employee at their highest tax rate (20%, 40% or 45%). Please note, the BIK is included in their tax code that applies to their salary.
  • The BIK is taxable on the employer as Class 1A National Insurance(NI) at a rate of 15.05%.

To sum up, the company will save CT on the car running costs and actual car costs (under Capital Allowances). However, the company and the director will also incur company car tax / NI on the BIK. Therefore, we will take a look at how to work out and calculate company car tax compared to using your private car.

A look at hybrid and electric cars

First of all, with the rising company car benefits in recent years gone by, it is now usually no longer beneficial to be running a company car. This is especially the case where the car has a large engine size and high CO2. Notably, because of this, many refer to such vehicles as `gas-guzzlers’.

However, in some cases, it can be tax efficient to run a company car that has low CO2 emission. What’s more, it can be even more beneficial if your car is a hybrid or electric type vehicle.

Indeed, any `normal’ vehicle that does not have ultra-low emissions is going to be more expensive to run as a company car than a private vehicle. Therefore, the type of car is an important consideration, when you are looking to obtain a company car for the future.

Hybrid and electric cars (continued)

It is also worth noting, the latest electric and hybrid cars which are tax-efficient at present, can be expensive to purchase too.

Therefore, if you are considering purchasing a company car, it is worth running this past your accountant. Most importantly, they will be able to work out if this will or will not be tax-efficient for you. Indeed, your accountant can also help you to choose an option that fits your circumstances. As a result, you should not end up paying any extra taxes.

Today, the rates that company cars are taxed are dependent on:

  • The level of CO2 that the car emits for petrol and diesel cars; and
  • The electric range for electric cars.

You can use a company car tax calculator to work out any benefits, or you can work these out yourself, or via your accountant. Therefore, let’s now take a look at this more closely.

Road tax

When you own a car in the UK, you will need to pay road tax on an annual basis. Please note, this charge is based on the CO2 emissions of your vehicle. In addition, when you buy a new car in the UK, there is also a registration fee of £55 if you are registering and taxing a vehicle for the first time with DVLA.

It should be noted that there is currently no vehicle excise duty (road tax) on electric cars. Therefore, if you buy an electric vehicle:

  • You will still have to tax your vehicle from the outset; and
  • Then renew your electric car road tax every 12 months, even though there is nothing to pay.

If you buy a hybrid car, the rate of road tax will depend on the year of registration and CO2 emissions. Please note, more information can be found online regarding your type of your vehicle.

Company car tax v private car -comparison 

The current company car BIK rates start at:

  • 2% for electric cars.
  • 23% for the greenest hybrids.
  • 25% for any car with 100 g/km CO2.

From 14%, the bands rise in 1% increments up to a maximum of 37%, with diesel models subject to a 4% supplement, should they not meet RDE2 tests.

Company car BIK rates

The table below shows how the percentage BIK rates vary with vehicle CO2 and electric-only range. This represents petrol, diesel, hybrid and electric-related BIK rates for the tax years 2022-2025. Please note, the below table makes use of current WLTP-derived CO2 data and for cars registered from April 2020. In addition, please see the separate table below for NEDC-derived CO2 BIK rates, for models registered before April 2020.

WLTP BIK Rates April 2022 to March 2025

The table shows BIK rates for models registered from 6th April 2020, based on official WLTP CO2 figures.
Vehicle
CO2
(g/km)
Electric
range
(miles)
FY 2022-23
%BIK Rate
FY 2023-24
%BIK Rate
FY 2024-25
%BIK Rate
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
0 2 2 2
1-50 130+ 2 2 2
1-50 70-129 5 5 5
1-50 40-69 8 8 8
1-50 30-39 12 12 12
1-50 <30 14 14 14
51-54 15 15 15
55-59 16 16 16
60-64 17 17 17
65-69 18 18 18
70-74 19 19 19
75-79 20 24 20 24 20 24
80-84 21 25 21 25 21 25
85-89 22 26 22 26 22 26
90-94 23 27 23 27 23 27
95-99 24 28 24 28 24 28
100-104 25 29 25 29 25 29
105-109 26 30 26 30 26 30
110-114 27 31 27 31 27 31
115-119 28 32 28 32 28 32
120-124 29 33 29 33 29 33
125-129 30 34 30 34 30 34
130-134 31 35 31 35 31 35
135-139 32 36 32 36 32 36
140-144 33 37 33 37 33 37
145-149 34 37 34 37 34 37
150-154 35 37 35 37 35 37
155-159 36 37 36 37 36 37
160-164 37 37 37 37 37 37
165-169 37 37 37 37 37 37
170+ 37 37 37 37 37 37

Notes to the above

** The rate applies to diesel vehicles not meeting the RDE2 standard. For diesel-hybrids, the Non-RDE2 4% diesel surcharge does not apply. All BIK rates will apply to cars registered from April 2020. Source: HMRC 2021.

4% supplement for non-RDE2 compliant diesels

HM Treasury levies a 4% diesel supplement over petrol models to account for greater levels of NOx emissions for the most current diesel cars. The supplement applies to diesel cars not compliant with the Real Driving Emissions Step 2 (RDE2) test, which confirms that real-world emissions are close to, or better than, the Euro 6 emissions standards for NOx.

NEDC Company car BIK rates 2022 – 2025

NEDC BIK Rates April 2022 to March 2025

The table shows BIK rates for models registered before 6th April 2020, based on official NEDC CO2 figures.
Vehicle
CO2
(g/km)
Electric
range
(miles)
FY 2022-23
%BIK Rate
FY 2023-24
%BIK Rate
FY 2024-25
%BIK Rate
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
0 2 2 2
1-50 130+ 2 2 2
1-50 70-129 5 5 5
1-50 40-69 8 8 8
1-50 30-39 12 12 12
1-50 <30 14 14 14
51-54 15 15 15
55-59 16 16 16
60-64 17 17 17
65-69 18 18 18
70-74 19 19 19
75-79 20 24 20 24 20 24
80-84 21 25 21 25 21 25
85-89 22 26 22 26 22 26
90-94 23 27 23 27 23 27
95-99 24 28 24 28 24 28
100-104 25 29 25 29 25 29
105-109 26 30 26 30 26 30
110-114 27 31 27 31 27 31
115-119 28 32 28 32 28 32
120-124 29 33 29 33 29 33
125-129 30 34 30 34 30 34
130-134 31 35 31 35 31 35
135-139 32 36 32 36 32 36
140-144 33 37 33 37 33 37
145-149 34 37 34 37 34 37
150-154 35 37 35 37 35 37
155-159 36 37 36 37 36 37
160+ 37 37 37 37 37 37

Notes to the above

** The rate applies to diesel vehicles not meeting the RDE2 standard. For diesel-hybrids, the Non-RDE2 4% diesel surcharge does not apply. All BIK rates apply to cars registered since 1998. Source: HMRC 2021.

How to calculate BIK

Car fuel benefit 25,300 x the appropriate percentage
Van benefit 3,600
Van fuel benefit 688

Example

2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC
Company car (£) Private car (£)
CT savings:
The vehicle running costs:
Fuel for the car 2,400
Repairs of the car 1,000
Insurance costs 500
Road Tax costs 200
Class 1A National Insurance 2,538
The Capital allowances on the vehicle that costs 37,155 x 18% 6,688
Mileage -27,000 miles:
10,000 miles at 45p 4,500
17,000 miles at 25p 4,250
Total costs 13,526 8,750
CT saved at a rate of 19% 2,570 1,663
Company car tax:
2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC. The CO2 emissions are 114 CO2
114 CO2 is equivalent to 26% of the list price of treating the car as a benefit in kind.
List price 37,155 x 27% 10,032
Car fuel 24,600 x 27% 6,831
Total benefits in kind 16,863
Basic rate Higher rate
taxpayer taxpayer
Tax on the contractor at an income tax rate of 20% 3,373
Tax on the contractor at an income tax rate of 40% 6,745
The Class 1A National Insurance at 15.05% 2,538 2,538
Total taxes on the company car 5,911 9,283
The overall tax savings for the company/individual:
Corporation Tax savings 2,570 2,570
The Taxes on benefits in kind -5,911 -9,283
Therefore, the overall tax savings (costs) for the company/individual are -3,341 -6,713

How to work out and calculate Company car tax -conclusion

The results

To sum up, as you can see, in this example, to run the BMW through your company, the overall tax bill would be £3,341 in company car tax costs per annum if you are a basic rate taxpayer. Alternatively, if you are a higher rate taxpayer, it will cost you £6,713 in tax costs.

In contrast, you will make overall annual tax savings of £1,663 if you keep the car as a private vehicle and are claiming for mileage allowances.

What’s more, the company will also reimburse the mileage allowances (£8,750 in this example) to the director tax-free. As a result, this reduces the amount of your drawings that are taxable income.

In conclusion, this example shows that you would be considerably worse off by running the BMW through your company due to the high CO2.

Hire car option

A further option is to consider car leasing. As with the company owning the vehicle, there will be a benefit in kind applied based on the same method by applying a percentage rate to the vehicle’s list price. However, the company can claim the hire costs as an expense (as opposed to claiming for the cost of the car). In addition, the business can reclaim 50% of the VAT on the hire costs if the business is VAT registered, and it is operating under the normal VAT scheme.

Going for the hire car option in the above example would result in a similar outcome, in terms of being worse off by hiring the car through your company. However, just like when you buy an electric car, you will probably be better off when you hire one of these.

Final thoughts

Today, the majority of contractors will run their vehicle as a private car and claim for business mileage through their company. In contrast, the few that do have company cars tend to have electric or hybrid vehicles, or a vehicle with a low CO2 if they are using a normal car.

What’s more, very few, if any at all, run a `gas-guzzler’ because the tax repercussions are simply not worth it with today’s tax system.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 9th, 2021 / Categories: Expenses /

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