This guide explains the tax implications of a company car on both the employee and employer and gives you a worked example.
A ‘company car’ is defined as a car owned by an employer made available for the use of one particular employee for both business and private usage. The car remains the property of the company.
The cash equivalent value of the benefit to the employee is taxed on the employee as with any other employment income as this is deemed as a Benefit in kind (BiK). The employer also has to pay Class 1A national insurance contributions on this cash equivalent value at a flat rate of 13.8%.
Benefit in kind
A benefit in kind arises when a car is made available for the private use of an employee or director without transfer of ownership because of their employment. This charge covers almost all running costs of the car – separate rules apply for fuel. The equivalent cash value of this charge is worked out in stages:
- List price – this is the price published by the manufacturer when the car was first registered and in most cases is not the same as the price paid. It also applies to second-hand. List prices of cars can easily be found out online or by asking the supplier. This price is inclusive of delivery and VAT.
- Accessories and optional extras – these are all non-standard features included with the car when first made available to the employee. It includes options added on after it was first made available to the employee but only if the cost exceeded £100. Again this includes delivery, VAT and fitting charges.
- Employee capital contributions – this is any one-off amounts paid towards the costs listed above by the employee. For the purposes of this calculation it is limited to a maximum of £5,000 even if they were higher.
- Emissions – a certain percentage is allocated depending on the level of CO2 emissions emitted by a car. These figures can easily be found online or from the supplier. The percentage rates are available here. Before using this bear in mind:
- CO2 emissions are always rounded down to the nearest 5g/km.
- For diesel cars, 3% is always added to the relevant percentage.
- The maximum percentage used is 37%.
- Availability – any benefit in kind charge is allocated to only account for the days in any particular tax year for which the car was available for the employee to use. Whether the employee used the car or not is not taken into account.
- Employee private use contributions – only when the employee is obligated to pay a certain amount towards the use of the car is this taken off when calculated the amount assessable as cash equivalent.
The BiK cash equivalent value is worked out as follows:
((List price + Accessories and optional extras – Employee capital contributions) x %Emissions x Availability) – Employee private use contributions.