Company car tax implications

Company cars and fuel cards can seem like a great perk for employees, but how will they affect your income tax?

goco author
Updated 30 November 2021  | 3 min read

Key points

  • Any 'extra' provided by an employer is a Benefit in Kind (BIK) tax
  • To find out how much you're paying, the first thing you need to do is calculate the taxable benefit
  • 'Free' fuel from your employer is another BIK
  • Gov.UK: Company car tax rules

Choosing the right model company car can be a crucial decision as the wrong option can cost you dear in tax. Besides considering what type of car insurance you need, here's what you need to know...

How the tax is calculated

Any 'extra' that's provided by an employer is known as a Benefit in Kind (BIK) tax.

This means that the cash equivalent is calculated for a particular benefit so that it can essentially be treated as extra salary.

This amount is then added on top of your normal income and charged at your highest rate of tax.

So, if you have a car that's provided by your employer and allows for private use, you'll be charged additional tax.

How much will it cost?

The BIK value that the taxman attaches to your car is a percentage of its list price and how much carbon monoxide (CO2) emissions it produces.

For tax purposes, this list price is known as the P11D value because it's the value of your car as it appears on your P11D form - a document that your employer provides to HMRC detailing any benefits you receive in addition to your salary.

The car's CO2 emissions are calculated using a system known as the appropriate percentage and you can find details of the latest figures by following the link on this page to the government website.

To find out how much you're paying, the first thing you need to do is calculate the taxable benefit and you'll need a lot of individual information to crunch the numbers.

To find out what the charges are for a particular model of car, HMRC has an online calculator.†

Those who are sitting close to the next tax threshold could see the cash equivalent push them over, meaning that they would have to pay part of the calculation at the higher-rate tax band.

What about free fuel? Does this affect my tax?

Don't forget to consider the impact that a work-provided free fuel card could have on your bank balance.

If you have such a fuel card, it might seem like you've hit the jackpot, but it could be a case of 'it's too good to be true'.

For instance, there's a further tax charge if free or subsidised fuel is provided for private use in a company car.

As the full taxable benefit depends on the CO2 emissions percentage charge, always check that any offer of free private fuel is worth it - you could be forking out more in tax than the fuel would cost you.

To calculate the cost is simple, as the tax payable on free fuel is based on a 'multiplier' cash sum applied to the rate of income tax you pay and the BIK tax band of your car.

Considering that any business mileage is reclaimed, if you drive a company car you should work out whether the tax you're paying is greater than the value of the fuel you're using for private use.

†Please note, we cannot be held responsible for the content of external websites and by using the links stated to access these separate websites you will be subject to the terms of use applying to those sites