What do you need to know about vehicle tax before you buy your company car fleet? Doug Kelley, Director of Bluedrop Services – specialists in fleet insurance – explains.
As an employee provided with a company car that is also used for personal use, understanding Benefit In Kind tax and fuel benefit can mean the difference between opting out of a company car, or making informed decisions on which vehicle you decide to pursue. Equally employers should understand the tax breaks and consider the choice of vehicle they offer, and if paying for personal fuel costs is actually worthwhile.
Before starting the process of claiming for your company car tax make sure you have all the information you need on hand. Fuel receipts and your Company Regristration Number are some of the most important things you need.
Company car tax explained
Any employee earning more than £8,500 pa and provided with a company car will be liable for Benefit In Kind (BIK) taxation. Often employees feel that they pay too much in tax on a company car scheme, forgetting the full implications of owning the vehicle themselves.
The amount of BIK tax you pay will depend upon the P11D price of the vehicle and the level of CO2 emissions, but excludes Road Fund Licence and 1st Registration Fee.
The P11D price is basically the list price the day before it was registered including delivery charges and any added extras selected with the car over £100. When calculating your Benefit In Kind payment the official CO2 level is rounded down to the nearest band to find the percentage of tax that you will need to pay.
But remember, the amount of tax you pay is also dependant on the type of fuel that is used. Choosing your company car wisely can therefore result in savings for both the employee and the employer, as employers also have to pay National Insurance Contributions (NIC) on the Benefit In Kind.
For example, petrol, petrol-electric hybrid and diesel-electric hybrid cars attribute the standard rate of BIK tax. Whereas Diesel cars require a 3% surcharge until the end of the 2016/17 tax year. All electric cars currently offer the best tax options and are zero rated but only until the end of the 2014/15 tax year.
Once you have calculated your Benefit In Kind, it then needs to be multiplied by your marginal rate of tax (either 20%, 40% or 45%).
Company car tax calculation
- BIK = P11D cost x CO2 emissions percentage
- BIK x marginal rate of tax
- £20,000 P11D and CO2 emissions of 120 for a petrol vehicle (until April 2015) would be 17% = £3,400
- Tax on the BIK at 20% would be £680 pa
Car fuel benefit
Some employers will offer ‘Free’ fuel as an additional benefit for use on private miles, however as an employee you will also be taxed on this. The Government have deliberately made this benefit expensive to try and reduce unnecessary miles with the Fuel Benefit Charge currently set at £21,700. This charge will change each tax year.
Again the charge calculation is based on the CO2 percentage band of your vehicle to reach your taxable benefit amount.
Car fuel benefit calculation
- Car Fuel Benefit = FBC x CO2 emissions percentage
- Car Fuel Benefit x marginal rate of tax
- £21,700 x CO2 emissions of 120 for a petrol vehicle (until April 2015) would be 17% = £3,689
- Tax on the FBC at 20% would be £737 pa
Car fuel benefit as you can see from this calculation doesn’t necessarily offer that much of a benefit at all. To make this benefit worthwhile it will depend on the number of private miles that you actually travel. You should look into this to truly consider if you are actually making any savings from this. In some cases it will actually work out better for both the employer and the employee not to offer ‘Free’ fuel as a benefit.
Should you opt out of a company vehicle?
If you take the route of not accepting a company car as a benefit then you will not have to pay BIK taxation, but you will need to pay out for the purchase of a car yourself. On top of purchasing a car you will need to maintain, service, tax and insure your vehicle (which would need to cover you for business use) – the total costs of which should not be underestimated!
With a company car your employer takes the burden away and covers all of these costs, and can often themselves secure significant savings in maintenance and fleet insurance costs. Of course your employer will be likely providing additional salary to compensate for the lack of remuneration by company vehicle, and you will be able to claim Approved Mileage Allowance Payments (AMAP) on the fuel that you use for business purposes, but the additional salary you receive will also be taxable and AMAPs often do not cover the additional wear and tear on your vehicle.
Often doing your research well and finding a good low emission company vehicle can be the best option in terms of making significant tax savings. Not only will you benefit from tax breaks from finding the right car but your employer will also reduce NI contributions and benefit from Capital Allowances against Corporation Tax.
What if your company vehicle is a van?
If you have a van as a company vehicle then you are likely to have to pay less in tax. If your personal use of the van is purely incidental then you would not have to pay Benefit In Kind. However, if personal use of you vehicle is allowed then you would need to pay a flat rate of BIK which is currently £3,090. If you also benefit from free fuel for personal use then you will need to pay an additional £581.
Information correct at the time of publishing, but subject to change.