Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
The tax benefits of driving a company car have been steadily reduced over many years. Most employers and employees are aware of the additional costs of providing company cars and the tax implications they create. However, for many employees, the lure of having a company car means that this remains a very popular option. Company cars, therefore, remain a well-used perk for attracting and rewarding staff.
However, there is a significant personal cost of having a company car. This company car tax is treated as a Benefit-In-Kind (BIK). This means that it can be costly to the employee to have this benefit. The full tax cost to the employee also depends on their top rate of personal tax and whether or not private fuel is provided free of charge.
The annual benefit is calculated as a percentage of the cars list price based on the level of CO2 emissions. The higher the CO2 emissions, the higher the rate of BIK tax paid. There is also a diesel supplement of 4% for all diesel cars that are not certified to the Real Driving Emissions 2 (RDE2) standard.
The diesel supplement is removed for modern diesel cars which are certified to the new RDE2 standard for nitrogen oxide emissions. The maximum rate including any diesel supplement is currently 37%. For cars registered before 1 January 1998, the charge is based on engine size.
Of course, by choosing a car with lower CO2 emissions employees may be able to make a significant difference to their company car tax bill.
The BIK value is essentially the car’s list price multiplied by the BIK percentage. A car’s list price is the manufacturer’s list price, including the cost of number plates, delivery charges, and VAT, plus any optional extras such as metallic paint.
It should also include any modifications after delivery that cost in excess of £100, such as high-spec wheels or an improved multimedia system. The limit of £100 means that inexpensive accessories which are made available during the period are not included in the benefit charge. However, a set of items should not be divided for this purpose – for example, a set of 4 alloy wheels with a total cost of £300 is not treated as 4 separate wheels each with an individual cost of £75.
There is also no time apportionment available for accessories so even if a modification was made part-way through the tax year, the additional cost applies for the whole tax year.
- A petrol car that was registered before April 2021 and that has CO2 emissions of between 125 and 129 grams would be taxed on 30% of its value during the 2020-21 tax year.
- A diesel car that does not meet the RDE2 standard emitting the same CO2 emissions as the petrol car above would be taxed on 34% of its value during the 2020-21 tax year.
There are special rules for electric cars. Under these rules, there is no BIK on pure electric cars in 2020-21. In 2021-22 pure electric cars will see a BIK rate of only 1%. This means that company car drivers who switch to an electric car will see their tax bill significantly reduced.
Car benefit is calculated in a series of numbered steps as highlighted by HMRC:
- Find the price of the car. This is usually the manufacturer’s list price of the car including VAT, delivery and number plates. The list price taken is the list price on the day before the car was first registered. There are special rules for calculating the list price of certain classic cars.
- Add the price of any accessories which fall to be taken into account. The main exceptions are accessories designed solely for a disabled person and mobile phones.
- Make any required deductions for capital contributions by the employee. This means that if the employee makes a contribution to the cost of the car, this amount is deducted up to a maximum of £5,000.
- Find the appropriate percentage for the car.
- Multiply the figure at Step 3 by the appropriate percentage at Step 4.
- Make any required deduction for periods when the car was unavailable.
- Make any required deduction for payments by the employee for private use of the car.
- Make any required adjustment where the car is shared.
Once the value of car benefit has been calculated, the taxable value is reported to HMRC using a P11D form. P11D forms are used to provide information to HMRC on all BIKs provided to employees.
If we use the example above on a car valued at £40,000 then BIK for a higher-rate taxpayer (who pays Income Tax at 40%) will result in an additional amount of PAYE due of £4,800 (£40,000 car x 30% of car value x 40% tax rate).
This payment is usually collected by adjusting the employee’s tax-free allowance through their PAYE tax code. This allows the employee to pay the tax due over the tax year. No employee NICs are due on the BIK.
The deadline for submitting the P11D and P11D(b) is by 6 July following the end of the applicable tax year. The payment of any Class 1A NICs owed on expenses or benefits must reach HMRC by 22 July (19 July if you pay by cheque).
Company car unavailable
If an employee does not have access to their company car for a period of 30 consecutive days or more (for example, if the car is undergoing extensive repairs and the employee is not provided with a replacement car) then the BIK is reduced accordingly.
If the normal car is not available for a period of less than 30 days, there is no reduction because the car is not deemed to be ‘unavailable’ during that period.
Employer provided private fuel
Where an employee with a company car is provided with fuel for their own private use by their employers, the default position is that the employee is required to pay the car fuel benefit charge. The charge is determined by reference to the CO2 rating of the car, applied to the car fuel benefit multiplier. This is currently £24,500 (2020-21). The fuel benefit is not applicable when the employee pays for all their private fuel use. This is known as ‘making good’.
The easiest way to do this is for the employee to use the advisory fuel rates published by HMRC to repay any private fuel costs to their employer. The advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly with changes taking effect on 1 March, 1 June, 1 September and 1 December.
However, the car fuel benefit charge will still be payable if it cannot be demonstrated to HMRC that the driver of the car has paid for all fuel used for private journeys, this includes commuting to and from work. To ensure that this does not occur employees will need to keep a log of private mileage.
If this is the case, HMRC will accept that there is no car fuel benefit charge, and the employee will save the Income Tax charge on their private car fuel. It will usually be cheaper for an employee to repay their employer for private fuel rather than to pay the Income Tax charge especially if their private mileage is relatively low.