A lot of us do not know how car tax works. So before signing up for and choosing a company car, you need to do your homework because a poor choice can cost you thousands over the years that you’re using the car.
If you are a small business owner, contractor, or freelancer looking to use company electric cars, this article is specifically tailored for you. You will learn how company car tax on electric car works, and how to calculate your car tax with a calculator so you can be tax-efficient and save more money.
And finally, we posted a Company Car Tax Update for the 2022/2023 financial year to keep you on track. So keep reading till the end.
Let’s start with the basics.
What is Company Car Tax?
Simply put, a company car tax is payable to anyone with a company car that can be used for business and personal purposes. You pay tax on your company car’s value, which depends on its cost and the fuel it uses.
It doesn’t matter if you spend 5,000 personal miles or 5,000 business miles a year, or a week. Whatever the ratio is, if there’s a personal mileage allowed in that car, and if your insurance allowed it for personal use, you will be paying tax.
The rules state that the lower the CO2 emissions, the more favourable the capital allowances rates will be.
The car’s value can be reduced if:
- you’re using it part-time
- your company provided it to you on a lease
- its CO2 emissions are low
A separate tax will be payable if the employer pays the fuel for your car’s personal use.
CO2 Emissions Figure
The first thing you need to determine is the CO2 Emissions Figure, which is equivalent to the amount of CO2 your car emits. Non “Euro 6” diesel cars pay a 4% additional tax surcharge compared to petrol cars.
This is very important when looking for cars because the lower the CO2 emissions, the lower the tax bond for that car would be. One of the benefits of purchasing an electric car is the tax incentives you get due to the very low CO2 emissions.
Benefit in Kind
A Benefit in Kind or BiK is a non-cash benefit with a monetary value provided to the employee. These benefits might also be referred to as national pay, fringe benefits, or perks. The benefits have monetary value, so they must be treated as taxable income.
P11D is the form your employer submits which contains the Benefit in Kind.
These non-cash benefits of monetary value could be private medical insurance, company car, gym membership, etc., where, instead of paying you money, they can give you a benefit.
BiK Bands or Value
The BiK band is determined by the car CO2 emissions figure. Add 4% to the % figure to non “Euro 6” diesel cars. E.g. a Petrol car with 101 g/km of CO2 is in the 25% band for the tax year 2021/2022.
Latest Car Reviews – Company Electric Vehicles
The pure electric vehicle (EV) was not subject to Benefit in Kind tax for 2020/2021, but for the 2021/2022 financial year, they attract a BiK rate of 1% and just 2% in 2022/2023.
So if you have an electric car right now, you’d be paying as little as a hundred for the car tax at the end of the year.
This means company car drivers who choose an EV will save thousands compared to the driver of comparable petrol, diesel, or PHEV.
Like the majority of tax systems, BiK rates change with the changing budget announcement. Usually, taxation rates may increase over time. But the government has been promoting electric vehicles and tweaking the system to favour the purchase and use of such cars.
Your Income Tax Rate
The P11D value of the car will be added to whatever your earnings are in order to calculate your tax band. If you go into the next band even slightly, you will pay a higher level of tax on the whole thing.
What you also have to consider are the cost of the company car and the percentage you get from the BiK band.
Say for example you have a £30.000 car and a 25% band, which is £7,500 in what you currently earn, that’s going to push you into the next income tax band. You must look into that because if it pushes you even £1, you will be paying 40% on that car then.
A lot of people get a company car towards that next tax band and putting in £10,000 to £20,000 on top might be the thing that cost you a lot of money.
Calculate Your Tax Rate with a Car Tax Calculator
There’s a government website by the HM Revenue and Customs (HMRC) with an online form where you can input all the bits of numbers and calculate everything for you. Just use the HM Revenue and Customs (HMRC) CCCF Calculator.
Another option is the comcar.co.uk company car tax calculator. The car tax calculator works pretty much in the same way as the HRMC tax calculator but it gives you a little bit more details like a summary of the tax components, the electric battery range of your car, and some vehicle details.
If you want to do it manually, the formula for calculating your Co Car Tax is based on the HM Revenue and Customs CCCF Calculator:
Car Cost x BiK Band % = BiK Value x Your Income Tax Level
For instance, if you have a salary that sets you under a 20% tax back while your electric car gets a 25% BiK rate, you’ll have to pay 20% of 25% of its value.
- 25 % of £20,000 car = £5,000
- 20% of £5,000 BiK rate = £1,000
Another Example:
- 28,000 car + £2,000 optional extras = £30,000 Car Cost
- Given BiK Band % = 20%
BiK Value is (Car Cost x BiK Band %) = £7,500
Tax on £7,500:
- At 20% = £1,500 per anum
- At 40% = £3,000 per anum
- At 45% – £ 3,375 per anum
Think about that and other extras you have. If your workplace pays for your gym membership or private medical insurance, that’s on top of your BiK Band % value
If you do earn quite a lot of money, watch out for stealth tax on anything over £100,000. Between £100,000 and £123,000, the government removes your personal tax allowance so all the different bands move forward.
You start paying electric vehicle company car tax the moment you earn a pound and go through all the different tax bands and reach the 40% band earlier. So it’s important to remember this because it will have a huge effect on the amount you take home.
What About VAT?
You can claim 100% of the VAT on a new car provided that it is used 100% for business purposes only – no personal use at all. If there is any personal use, even just one mile, then you will not be able to claim back the VAT at all.
If you are leasing the car, you can claim back 100% of the VAT if there is no personal use. The good news here is that if there is personal use, then you can still claim back 50% of the VAT.
Electric Car Tax Updates for 2022/2023
There’s currently zero tax on Benefit in Kind during 2020 / 2021 for hybrid vehicles with emissions from 1 – 50g/km and a pure electric range of over 130 miles. The electric car tax on BiK rate will increase to 1% in 2021 / 2022 and 2% in 2022 / 2023. This is a great saving for businesses.
The recent 2022/2023 rates are based on the latest car reviews by World Harmonised Light Vehicle Test Procedure (WLTP) CO2 emissions tests.
| Company Car Tax Bands For The 2022/2023 Financial Year | ||
| BiK rate | Annual Tax Liabilities | |
| EV, registered from April 6, 2020, | 2% | £120 |
| PHEV, CO2 = 44g/km, registered after April 6, 2020 | 14% | £840 |
| Diesel, Diesel, CO2 = 120g/km, registered from April 6, 2020 | 33% | £1,980 |
| Petrol, CO2 = 137g/km, registered from April 6, 2020 | 32% | £1,920 |
Two sets of BiK rates can be provided to accommodate car owners from older company cars. These sets accommodate cars registered before April 6, 2020, covered by one system of BiK rates (the NEDC-correlated rates), and cars registered after the said date (under WLTP) covered by another.
The post-April 2020 set of rates for company cars get a percentage point from the BiK to level the playing field since these cars will have CO2 emissions about 20% higher than previous NEDC-tested equivalents.
Additional Pointers
For many years, when only two car options were petrol and or diesel, the perks of a company car through your limited company were long gone and quite taxing.
Since the advent of hybrid plug-in electric vehicles and electric company cars, the UK government is now encouraging motorists to get one through generous car tax breaks and even grants.
You can get a grant up to the maximum of £3,000 for a plugin low-emission vehicle. Read The OLEV Government Grant for more details on this.
Going back to taxes, look and prepare for ever-changing goalposts – watch the budget occasionally as car tax changes regularly, and almost always for the worst.