Company car tax bands: how much will you pay?

Close News by Alex Grant 5 mins read 3 April 2023 Share

There are almost 750,000 company car drivers in the UK, according to the latest HMRC figures. It’s a huge population, and the government has spent more than 20 years using tax incentives to encourage them to choose the most efficient vehicles.

Company car tax bands change every year, and the structure has evolved as new technologies have reached the market – but it’s simpler than it looks.

A company car is a vehicle that’s owned or leased by your employer, primarily for you to use for business trips, but also available for your private journeys outside work hours, including commuting. HMRC classes this as a benefit in kind, which is a catch-all term for any workplace perk provided in addition to your salary. Just like your income, it’s taxable.

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How is company car tax calculated?

The system affects both employer and employee tax bills, but most drivers will encounter it as a benefit-in-kind (BIK) payment deducted from their salary. There are several factors that can influence how much they pay.

The baseline is what’s called a ‘taxable value’ for the vehicle. This is a percentage of the list price (also known as the P11D value) based on its tailpipe CO2 emissions and, for plug-in hybrids, its electric-only range. The list price includes options, VAT and delivery charges but excludes the registration fee and the first year of VED. It’s also fixed for life, so it doesn’t reflect discounts for new cars or the lower price of a used one.

BIK is paid as a percentage of that taxable value in line with your income tax band (typically 20%, 40% or 45%, unless you’re in Scotland, which has different rates), and that annual figure is then split equally across your pay packets. For example, a 20% income taxpayer would be liable for 20% of the vehicle’s taxable value per year. The cheaper the car and the lower its CO2 emissions, the less you will pay.

Which tax band does my company car fit into?

The start point is finding out how much CO2 it emits and (for plug-in hybrids) the electric-only range, and your fleet manager or vehicle supplier should have that data. Manufacturers switched to a more granular and tougher economy test cycle in 2017, and both figures are affected by options such as larger wheels, sporty bodykits and even heavy panoramic sunroofs. This can cause some models to straddle multiple bands, so it’s important to check.

Those figures will help place the car in one of the following bands, which are used to calculate the taxable value. Company car tax is adjusted every April, and usually increases by a steady 1% point per year. However, bands are currently frozen until April 2025, with slightly different approaches for ultra-low-emissions vehicles (up to 50g/km of CO2) and other models afterwards.

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Calculating the BIK rate on diesel cars

From being the darling of the environmental lobby, diesel cars are now largely frowned upon, with the result that emissions tests have become tougher for them. The latest – mandatory on all new diesels sold from January 2021 – is called Real Driving Emissions Step 2 (RDE2).

Diesels registered before this date that aren’t RDE2-compliant (some gained RDE2 compliance early, so check with your supplier) attract a 4% surcharge on their published BIK rate, up to 37%. Remember that if you’re considering a used diesel as your company car. To be clear, all new diesels are now RDE2-compliant, meaning the 4% surcharge doesn’t apply.

Diesel-electric hybrids are classed as alternatively fuelled vehicles so avoid a surcharge whether they’re RDE2-compliant or not.

Calculating the BIK rate on electric cars

Zero CO2 emissions ensures that electric cars enjoy the lowest BIK rate. In 2020/21, it was actually 0%; but in 2021/22, it rose to 1%; and from 2022/23, it’s 2% until the end of the 2024/25 tax year. Either way, EV drivers pay much less company car tax than others.

Calculating the BIK rate on hybrid and plug-in hybrid cars