Company car BIK tax rates: How much will you pay?

  • We take a closer look at how company car tax is calculated
  • How much you get paid will affect your BIK tax bills
  • Company car tax jargon explained

Company car tax can be confusing at times, especially if you’re new to the scheme.

What isn’t always clear is how much you should pay - here we attempt to demystify the calculations, plus include tips on how to keep your monthly bills low and explain some of the meanings behind that confusing jargon.

Why do we have to pay tax on benefits?

There are lots of perks to getting a company car; it’s a shiny new car with the latest technology for a start, plus service and maintenance costs are taken care of and you’ll be covered under your employers' insurance too. Big savings could be made here.

Benefits-in-kind (BIK) refers to benefits you receive from your company that are not included in your salary. You only pay tax on a company car available for private use, including the commute. If you only use a company car for business mileage, you should not pay tax.

How does your salary affect what you pay?

How much you get paid each year will directly affect how much company car tax you pay.

You don’t start paying tax until you earn over £10,600 a year, after which 20 percent will be paid to Her Majesty Revenue and Customs (HMRC) - for example, if you earn £25,000 a year you’ll pay 20 percent tax on £14,400.

When your monthly salary exceeds £42,385, you will pay 40 percent on any amount over this threshold.

Unlike your salary, which is taxed by varying percentages depending on how much you earn, company car tax is a flat 20, 40 or 45 percent rate. So, if you earn £42,384 you will only pay 20 percent in tax. Earn a penny more and you'll have 40 percent of your company car's taxable amount (the P11D value divided by the BIK tax percentage) deducted from your pay each month.

The P11D value of the car is never added to your personal taxable income.

How to keep bills low

Company car tax isn’t just about how much you earn, though. You can keep your monthly bills to a minimum by choosing a car with a smaller P11D value and low CO2 emissions.  

For the lowest BIK bills you need to be looking towards alternatively fuelled cars like plug-in hybrids and electric cars. Although no longer tax-free, they will slot into a seven percent BIK tax band from April 2016.

These three amounts: P11D price, CO2 emissions and your salary banding, determine how much company car tax you will pay - firstly divide the P11D price of the car by the BIK tax band it slots into and then divide the amount again by the salary band you pay. This will give you the amount of tax payable during the year.

An example

You’ve picked a Ford Focus 1.6-litre Titanium diesel which emits 99g/km and has a P11D value of £23,240 – slotting into a 17 percent BIK tax band for the current 2015/16 tax year. The total taxable amount for this car is £3,950, so a 20 percent tax payer will be billed £790 each year while a 40 percent payer will need to pay £1,580.

For help calculating your monthly tax bills, head to our company car tax calculator here.

Why are tax bands changing each year?

A combination of continued pressure on the UK to lower greenhouse gases and engine technology continuing to make huge improvements means the Government is tightening the bands each year to encourage business drivers to pick greener vehicles.

Diesel cars are subject to an additional three percent surcharge, which was due to be scrapped in April but will now remain in place until 2021.

The good news is that BIK tax bands are published well in advance so you should be able to calculate your monthly tax costs for the next three or four years easily.

To view the latest BIK tax bands, click here.

What if I decide to take the cash?

Depending on whether you need a car to do your job, you may be offered the choice of a cash sum instead of the company car.

If you already own a car, have a small commute, or don’t want to be limited to what car you drive, opting-out and taking the cash sum could make more sense for you.

How much money you get varies between companies and you won’t have any BIK tax bills to worry about. One important thing to note though, is that if you decide to take the cash, this WILL be added to your salary and will be subject to personal income tax.

Some popular terms explained

Benefit-in-Kind (BIK) - Benefits you receive from your company which are not included in your salary

P11D Value – The list price of a car plus delivery fees, but without road tax and first registration fee – options will also be included if you select any

HMRC – The UK tax authority

CO2 emissions – The amount of carbon dioxide exhaust gases of a car

BIK tax bands – List of percentages from 5-37 that dicate how much you'll pay based on the amount of CO2 produced

Personal income tax – this refers to the amount of tax you pay on your salary

Need more information? These articles may help…

Company car tax: what to watch out for in 2016

Guide to reclaiming business mileage

Top 10 low-tax company cars

Future technology – what to expect in 2016

Top long-range diesel saloons