Company Car Tax 2023: Guide for Employers

Employees have to pay tax for private use of company cars.

Calculating company car tax involves a range of factors, including the vehicle’s list price, fuel type and level of CO2 emissions.

The following guide for employers looks at how the company car tax rules work in practice, including what has to be reported and paid each year to HM Revenue and Customs (HMRC).

 

How does company car tax work?

 

The private use of a company car is a common non-cash benefit, or benefit-in-kind, offered to employees as a perk of the job, in addition to or in lieu of part of their salary. However, for tax purposes, this is treated in the same way as earnings, counting as employment income. This is because the benefit of the car has been provided by reason of the individual’s employment, where its monetary value is regarded by HMRC as part of the overall reward for the job.

For many benefits-in-kind, the amount which is treated as earnings from employment is typically the cash equivalent value to the employee, although there are special statutory rules when it comes to valuing the private use of a company car.

In broad terms, the company car tax rules apply to any private use of a vehicle outside working hours, including commuting, unless an employee is travelling to a temporary place of work. If you pay for an employee’s fuel they use for personal journeys, they’ll also have to pay tax on this separately.

 

Do employers pay tax on company cars?

 

Although it’s the individual employee who will be liable to pay Income Tax on the value to them of using a company car for private use, as the employer providing this type of taxable benefit you’ll still have certain National Insurance and reporting obligations to HMRC.

First, unless the car you provide is exempt under the rules, for example, where it’s for business use only, you’ll be liable to pay Class 1A National Insurance contributions on the value of the company car for the employee’s private use. This will also extend to any fuel paid for or provided by you for personal journeys, unless the employee reimburses you in full. The Class 1A National Insurance percentage rate from 6 November 2022 to 5 April 2023 on expenses and benefits is 14.53%.

Secondly, you must either deduct tax at source from an employee’s pay, known as ‘payrolling’, or report any company car and/or fuel benefits to HMRC at the end of the tax year using form P11D. This form summarises the value of any taxable benefit that the employee has received, where this information will then be used by HMRC to adjust the employee’s tax code.

For both payrolled and non-payrolled taxable benefits, you’ll need to submit form P11D(b) so that you can pay any Class 1A National Insurance contributions on the value of the benefits that you’ve provided to employees during the course of the tax year. You must send the completed form to HMRC by 6 July following the end of the tax year. You’ll also need to pay any Class 1A National Insurance owed on any benefits-in-kind, including company cars and fuel, by 22 July if payment is by an approved electronic method, or 19 July if paying by cheque.

Finally, when a company car is given to an employee, or at some point replaced, you must notify HMRC, providing certain details about the vehicle. This can either be done when the car is provided to the employee using form P46, or it can be processed through payroll.

 

How much tax does an employee pay?

 

If you provide an employee with a company car as part of their overall salary package, and the employee uses that car privately, including for journeys between home and work, this will be treated by HMRC as a benefit-in-kind for which the employee will be liable to pay Income Tax on the value to them of using that car for private use.

The amount of tax that an employee will be liable to pay on a company car is, in broad terms, based on the value to the employee of using the vehicle outside of working hours. This will depend on things like how much it would cost to purchase the vehicle and the type of fuel it uses. That said, the value of the car benefit is reduced if, for example:

• the vehicle is unavailable for at least 30 consecutive days
• the employee pays something towards its’ cost
• the vehicle has low CO2 emissions.

There is an online GOV.UK tool for employers and employees to estimate how much tax an employee will be liable to pay on both the benefit of a company car and fuel. However, in order to calculate the tax due on any company car and/or fuel benefit, the amount assessed will need to be applied to an employee’s other income and tax information, as the employee will have to pay tax at the applicable rate based on their overall salary and the relevant tax band.

The total tax that an employee has to pay will depend on their tax status, i.e. whether they’re a basic or a higher rate taxpayer. For example, if the company car benefit charge for the 2022/2023 tax year is calculated at £10,000, this would equate to £2,000 tax if the employee pays tax at the lower rate of 20%, and £4,000 if they pay tax at the higher rate of 40%.

Applying the same company car benefit charge, for the employer paying Class 1A National Insurance, payable at a rate of 14.53%, the cost would be £1,453.

 

How to calculate company car tax

 

As an employer, if you provide a company car and/or fuel for an employee’s use outside of work, you’ll need to work out the taxable value so that you can report this to HMRC, and pay the relevant Class 1A National Insurance on this when due.

You can calculate the taxable value using your commercial payroll software, if you have this. Alternatively, you can use HMRC’s company car and car fuel benefit calculator at GOV.UK. Using HMRC’s online calculator, select fuel type ‘F’ for diesel cars that meet the Euro 6d standard, also known as Real Driving Emissions 2; fuel type ‘D’ for other diesel cars; and fuel type ‘A’ for petrol cars. You can search for car fuel and CO2 emissions data online.

You can also manually calculate the taxable value of a company car using form P11D working sheet 2. It’s worth noting, however, that company car tax is calculated using the same method, having regard to its’ retail price, fuel type and CO2 emissions, regardless of whether the car is purchased by your business outright, or whether it’s leased or financed via hire purchase. This means that an expensive car with high CO2 emissions will attract a large tax bill.

 

Are there company car tax bands?

 

Company car tax bands are based on a number of factors, including the type of fuel the vehicle uses, if it’s a hybrid or electric-range only, and its official CO2 emissions. The CO2 is the primary factor here, because the UK government wants to incentivise us all to drive cleaner cars, such that the lower the car’s CO2 emissions, the less tax an employee pays.

Zero CO2 emissions ensures that electric cars enjoy the lowest rate. In the tax year 2020/21, it was 0%, although this increased to 1% in 2021/22, and from 2022/23, it is 2%.

For hybrid company cars, if the vehicle has CO2 emissions of 1 to 50g/km, the taxable value of the car is based on its zero emission mileage figure or its electric range. This is the distance that the car can go on electric power before its’ batteries need recharging.

 

Company car tax exemptions

 

If the provision of a company car has been provided as part of a salary sacrifice arrangement, this will be subject to the company car tax rules. However, the car may be exempt, meaning you don’t have to pay or report on the car, if:

• the vehicle is privately owned by employees or directors
• the vehicle is available for business journeys only, including qualifying pool cars, shared
• by employees for business purposes and normally kept on company premises
• the vehicle has been adapted for an employee with a disability.

A car is available for business journeys only if the journey is part of your employee’s duties, for example, a service engineer travelling to an appointment, or where the employee is travelling to a temporary workplace. However, to be exempt, the employee must be told not to use the vehicle for private journeys and you must check that they don’t in fact do this. For company cars adapted for employees with a disability, these cars will be exempt under the rules if the only private use is for journeys between home and work and travel to work-related training.

You also don’t have to pay or report on fuel, including for private journeys, if employees either buy the fuel for their own use, or you buy it but the employee then pays you back during the tax year, and their payment is equal to or more than the amount you paid out.

 

Company car allowances

 

A company car allowance is simply a cash sum added to an employee’s annual salary, where employees can use the money to either buy their own car or to lease a vehicle privately. In these circumstances you don’t have to worry about the complex rules relating to company car tax, although the employee is still liable to pay Income Tax because it’s a cash benefit scheme.

However, a company car allowance offers various advantages over company car schemes, including providing employees with the flexibility to decide how they spend that cash sum, whilst delegating to them the responsibility of maintaining and running their own vehicle.

 

Company car tax record-keeping

 

As an employer, you must keep a record of all benefits-in-kind you provide to your employees, including the private use of company cars. Your benefit-in-kind records must show that you’ve reported benefits accurately and any end-of-year forms are correct, including form P11D(b) and your Class 1A National Insurance contributions payment.

HMRC may ask for proof of how you’ve accounted for each non-cash benefit at the end of the tax year. Your records should therefore include the date and details of each vehicle provided, any information used to work out the amounts disclosed, including the car’s list price, and any contributions made by the employee to the cost of that vehicle.

These records must be kept for a period of 3 years from the end of the tax year they relate to.