Sylvie Willis
Company car tax is a complex topic, with many factors influencing how much tax is owed. The tax rate depends on the type of fuel, the vehicle's purchase price, and its tailpipe emissions. If an employer provides a company car for private use, the taxable value must be reported to HM Revenue and Customs (HMRC). This includes employees' journeys between home and work, unless they are travelling to a temporary place of work. The taxable value of a car is not the same as its cost and can be influenced by factors such as the amount of time the car is unavailable during the tax year. To calculate the taxable value, employers can use commercial payroll software or HMRC's company car and car fuel benefit calculator. Employees pay tax on the value of the vehicle, which is determined by several factors, including the purchase price, type of fuel, and emissions. If an employer provides fuel for personal journeys, this will be taxed separately.
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What You'll Learn
Calculating taxable value
As an employer, if you provide company cars or fuel for your employees' private use, you'll need to calculate the taxable value and report this to HM Revenue and Customs (HMRC).
The taxable value of a car is not the same as its cost. The taxable value depends on the amount of time the car is unavailable during the tax year, for example, because of a mechanical fault. The taxable value of fuel must also be reported in addition to the value of the vehicle for federal income tax purposes.
There are several methods to determine the taxable value of a company car. These include the general valuation method, the annual lease value method, the cents-per-mile method, and the commuting-valuation method.
The general valuation method determines the fair market value of the employer-provided vehicle, which is the amount the employee would pay to lease the same vehicle in the geographic area where they use it. The annual lease value method can be used if the vehicle is provided to the employee for the entire calendar year. The value is determined according to a table provided in IRS regulations and is then multiplied by the employee's personal-use percentage for the vehicle (personal miles divided by total miles driven).
The cents-per-mile method is calculated by multiplying the number of miles driven for personal use by the standard mileage rate. For 2023, the business mileage rate is 65.5 cents per mile. This method can only be applied if the vehicle is regularly used for business, driven more than 10,000 miles during the year, and does not have a fair market value exceeding a certain threshold (between $60,800 and $62,000).
The commuting-valuation method can be used when an employee is required, for bona fide non-compensatory business reasons, to travel between home and work in a company vehicle that is not otherwise available for personal use. A flat rate of $1.50 one-way ($3.00 round trip) may be used to value the commute. The employer must have a written policy stating that the only personal use of the vehicle is for commuting purposes.
Additionally, if an employee pays for all the fuel for their personal miles, this amount can be deducted from the total fuel costs.
To work out the taxable value of company car fuel benefit, you can use HMRC's company car and car fuel benefit calculator. You can also use online tools from HMRC or your payroll software.
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Using online tools
As an employer, if you provide company cars or fuel for your employees' private use, you must determine the taxable value and report it to HM Revenue and Customs (HMRC). The taxable value of a car is not the same as its cost. It depends on the amount of time the car is unavailable during the tax year, the type of fuel the vehicle uses, how often the employee has the vehicle, and the amount the employee pays towards the cost of the vehicle.
There are several online tools available to help you work out the taxable value of company cars and fuel. For instance, you can use commercial payroll software or HMRC's company car and car fuel benefit calculator. Alternatively, you can use advisory fuel rates to calculate mileage costs if you reimburse an employee for fuel used for business travel.
If your company operates a fleet of vehicles, you can use a fuel card program, such as WEX's fleet card, to simplify fuel tax reporting. These cards automatically capture the necessary fuelling data, including the number of gallons purchased, the type of fuel, date, time, truck number, invoice number, and the location of the purchase. This data is then used to generate reports that provide a state-by-state breakdown of fuel purchases, which simplifies the process of paying fuel taxes in multiple states.
Additionally, you can use telematics tracking systems, such as MileageCount, to accurately track the business mileage of your drivers. This can help streamline tax reporting and provide opportunities to optimise routes and save money.
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Manual calculations
If you want to manually calculate the taxable value of a company car, you can do so by following these steps:
Firstly, it's important to note that the taxable value of a car is not the same as its cost. The taxable value depends on the amount of time the car is unavailable during the tax year, for example, because of a mechanical fault. If the car was unavailable for at least 30 consecutive days during the tax year, you can work out the value manually on the P11D working sheet 2.
Next, you need to determine the value of the car. This can be done by taking the list price, including any optional extras, VAT, and delivery charges, and removing the cost of the first-year registration fee and the annual VED car tax. This will give you the P11D value of the car.
Then, you need to determine the value of personal use and employer-provided fuel. This can be done by multiplying the number of miles driven for personal use by the standard mileage rate. This will give you the taxable value of the benefit.
If the employer provides fuel in addition to the car, the value of the fuel must also be reported. The value of the fuel can be calculated based on the fair market value (FMV) of the fuel (based on receipts) or a flat rate per mile for all miles driven.
Finally, you can calculate the company car tax by multiplying the P11D value of the car by the percentage banding it falls into, which is determined by its emissions. This will give you the Benefit-in-Kind (BIK) value of the car.
It's important to remember that if an employer pays for the fuel used for personal journeys, this will be taxed separately. Additionally, if you are a sole trader, you can claim the full running costs of the vehicle, including fuel, minus an appropriate amount for personal journeys, or claim full business mileage rates for business journeys as set by HMRC.
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Private use
When it comes to private use of a company car, it's important to understand how this can impact your tax liability. Here's a comprehensive guide to help you navigate this topic:
Tracking Private Use
It's essential to keep accurate records of private usage. This includes both personal mileage and fuel usage. Mileage logs should be maintained, recording the car's odometer readings at the start and end of any personal trips. Additionally,
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Benefit in Kind tax
Benefit-in-kind (BIK) tax is a tax on company benefits, most commonly referring to company cars. This tax is paid by the employee alongside their standard income taxes. The exact amount of tax owed is calculated using the car's make and model, as well as its emissions. While BIK tax is largely associated with company cars, it can apply to other benefits, such as living accommodation, medical insurance, and loans. It's important to note that BIK tax doesn't apply to fuel cards as long as they are used purely for work purposes. Company meals, company gyms, and other resources shared equally among employees are also exempt from BIK tax.
The BIK rate is higher for diesel vehicles and lower for electric vehicles, with a 0% BIK rate for electric cars in the first two years and only 2% thereafter. To calculate the BIK tax on a company car, you need to determine the taxable value of the car, which is not the same as its cost. The taxable value depends on factors such as the amount of time the car is unavailable during the tax year and whether it is used for private purposes, including commuting. 'Private use' includes employees' journeys between home and work, unless they are travelling to a temporary place of work.
There are a few methods to calculate the taxable value of a company car. One way is to use online tools provided by HM Revenue and Customs (HMRC) or commercial payroll software. Another method is to calculate it manually using the P11D working sheet. To determine the BIK tax on fuel, you can take your BIK percentage and multiply it by the fuel charge multiplier, which was £25,300 for the 2022 tax year.
It's worth noting that if the cost of the car and fuel is less than the amount of salary given up, report the salary amount instead. Additionally, from 2026, payrolling benefits will become mandatory, so it's advisable to switch to payroll processing now if you're currently using P11D forms. While the employer is responsible for calculating and deducting BIK tax from the employee's final payslip, employees can use these methods to estimate their tax liability and make informed decisions about their company car usage.
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Frequently asked questions
Company car tax, also known as Benefit in Kind (BIK) tax, is a tax paid by employees on the value of the benefit of having a company car. This includes any benefit given to the employee in addition to their salary that they enjoy a personal benefit from, such as a company car that is used for private and business purposes.
To calculate company car tax, you need to multiply the car's P11D value by the percentage banding the car sits in. The P11D value of a car can be calculated by taking the list price, including any optional extras, VAT, and delivery charges, and removing the cost of the first-year registration fee and the annual VED car tax.
The taxable value of a company car is the value of the benefit that the employee receives from having the car. This value is determined by factors such as the purchase price, the type of fuel, and tailpipe emissions. The taxable value can be reduced if a financial contribution is made towards the cost, if the car is only driven part-time, or if it produces low CO2 emissions.
As an employer, if you provide company cars or fuel for your employees' private use, you must report the taxable value to HM Revenue and Customs (HMRC). You can calculate the taxable value using commercial payroll software or HMRC's company car and car fuel benefit calculator.
Company car tax refers to the tax payable by employers on company cars, while Benefit in Kind (BIK) tax refers to the tax payable by employees on the value of the benefit they receive from having a company car.
