To misquote an age-old adage, two things are certain in life: death and company car tax . You cannot evade the initial cost, and no matter how much effort you put into avoiding the secondary one, you will ultimately have to pay something.
Certainly, this presupposes that you have access to a company vehicle; however, considering approximately 700,000 individuals currently benefit from such an arrangement, the likelihood seems quite substantial.
For the tax authorities, a company car is like a golden goose: in the fiscal year 2021/22, the overall taxable amount from company car benefits reached £3.95 billion. Nevertheless, as another adage goes, the times they are a-changing.
Two words: electric cars These attract significantly lower levels of taxation compared to petrol and diesel vehicles, making them extremely popular among company car drivers.
For instance, during the tax year 2021/22, the count of beneficiaries was company cars With CO2 emissions of 75g/km or lower, there were 243,000 vehicles, up from 137,000 in the prior fiscal year, and fully electric cars made up 17% of vehicle beneficiaries. This data is from three years back, after which the share of such vehicles has continued to change. company EVs has surged significantly due to their rising popularity and schemes like salary sacrifice.
To put it briefly, the tax authorities are facing financial losses, yet they aren’t ready to surrender just yet. Therefore, here’s how you can exit this situation still fully dressed metaphorically speaking.
What does "company car" mean?
This is a vehicle provided by your employer alongside your regular pay, allowing you to utilize it both for personal trips and work-related travel. Personal use encompasses daily commutes.
What does company car tax entail?
It’s a levy on a perk, specifically a company car. While you might consider the vehicle distinct from your wages, from HMRC's perspective it's just another type of compensation—hence subject to taxation. This is precisely why they refer to it as Benefit-In-Kind tax.
What is the method for calculating company car tax?
The tax calculation hinges on the sum of the car’s listed price inclusive of VAT along with additional features (referred collectively as the P11d value). This total figure is then adjusted using the vehicle's officially recorded CO2 emission levels stated as a percentage—termed the BIK rate. By multiplying this outcome by the individual's income tax bracket, one arrives at the taxable amount that the employee needs to cover for their company car usage.
The BIK rates vary between a maximum of 37% for cars releasing over 170g/km CO2 and a minimum of 2% for zero-emission vehicles. In the case of hybrid models, their electric-only driving range influences these percentages as well. Additionally, an extra charge of 4% is applied to diesel-powered vehicles failing to meet the stringent RDE2 emission criteria.
Example:
The P11D valuation for the vehicle stands at £20,000. The CO2 emission level is recorded as 95 grams per kilometre. It runs on petrol fuel. The Benefit-in-Kind (BIK) percentage assigned to this car is 24%. If we consider your individual income tax bracket which is set at 20%, then the calculated BIK amount based on the P11D price would be £4,800. Consequently, the taxable sum you must pay annually equates to £960, translating into a monthly figure of £80.
What benefits does having a company car offer?
Despite covering the taxes, an employee provided with a company car still ends up financially ahead compared to someone purchasing their vehicle using after-tax earnings. For instance, they would struggle to find a new car costing £80 per month through personal means alone.
What steps can I take to lower my company car tax liability?
Choose an EV
HMRC has spent the past 20 years using company car tax to incentivise low-CO2 vehicles, and there's none lower than an electric car.
Until April 2025 electric cars (rated at 0g/km CO2) are taxed based on 2% of their P11d price, whereas even the most efficient petrol and diesel models start at 25%. That’s usually enough to reduce your tax bill by 90%.
For context, a 20% taxpayer in a £30,000 Vauxhall Astra GS Line diesel would pay around £158 in benefit-in-kind per month, whereas their boss on a 40% income tax band would pay just £83 for a £120,000 BMW iX M60.
It’s hardly surprising that battery-electric has become the most popular powertrain type for new fleet lease cars, according to the British Vehicle Rental and Leasing Association (BVRLA).
Or choose a hybrid
If you are not ready to ditch combustion engines completely, the BIK rates also heavily incentivise plug-in hybrids with the longest electric range – and this can offset their higher list price.
For example, the Toyota RAV4 Plug-in has an electric-only range of 46 miles, so it falls into the 8% BIK band, whereas the Ford Kuga 2.5 PHEV ST-Line X Edition travels up to 35 miles on a full charge and is taxed at 12% of the list price. Despite the Toyota’s £4500 list price disadvantage, drivers will pay around 25% less in tax than they would on the Ford.
Be selective with options
In 2017, Europe’s automotive industry switched to a new fuel efficiency test, catchily known as the worldwide harmonised light vehicles test procedure, or WLTP.
Alongside tougher test conditions, it produces more granular data, including recognising differences between trim levels and the effects of optional equipment on efficiency.
Before you get carried away adding options, it’s worth double-checking that the larger wheels or panoramic sunroof you’ve just selected don’t push the car into a higher tax band. They can turn into expensive luxuries over a three-year lifespan.
Look out for fleet trims
Fleets and leasing companies have enough buying power to negotiate discounts on new cars that private buyers wouldn’t be able to access. Unfortunately, this isn’t reflected in the list price and those discounts won’t result in lower benefit-in-kind for drivers.
Instead, to help pass those savings on, some manufacturers offer fleet-focused trim levels that add essential kit but in effect have the discount built into the list price. The result is lower benefit-in-kind payments than for an equivalent retail-focused version.
Select a commercially viable vehicle with tax benefits
Commercial vehicles weighing less than 3500kg and with a payload of 1000kg are a bit of a bargain in benefit-in-kind terms. Instead of being taxed based on a CO2-weighted percentage of their list price, they attract a standard tax charge. Until the end of the 2025/26 tax year it is £3960, which means they can be a tax-efficient alternative to a large car. It's even better news for electric commercial vehicles, whose standard tax charge is set at £0.
This loophole for light commercial vehicles with a 1000kg payload has created a market for double-cab pickups among open-minded company car drivers.
These provide dual rows of seating, top-tier trims, and greater towing capability than most households could possibly require. Should you be able to overlook their heavy fuel consumption and somewhat bumpy ride quality, these vehicles serve as a far less expensive corporate car option compared to an equivalent-sized sports utility vehicle.
Nevertheless, the additional row of seating might reduce the cargo space and payload capacity for certain double-cab variants; thus, ensure that your chosen model meets this criterion: these vehicles along with similar ones having a maximum carrying weight under 1000 kg are classified as automobiles and therefore subject to taxation based on their CO2 emissions.