When determining how much tax you pay on a company car allowance, it depends on how much the allowance covers your car’s annual running costs. If the allowance covers less than your actual running costs, you won’t have to pay tax on it. However, if the allowance covers more than your running costs, the excess amount will be taxed as part of your income. The tax rate applied to the taxable amount will depend on your income tax bracket. Additionally, if your company car is considered a benefit-in-kind, you may also need to pay National Insurance contributions on the taxable amount. It’s important to consider the potential tax implications before accepting a company car allowance and ensure you factor in the actual running costs of your vehicle to avoid any unexpected tax liabilities.
Taxation of Company Car Allowance
A company car allowance is a benefit provided by an employer that allows employees to use a company car for personal and business purposes. The amount of tax paid on a company car allowance depends on several factors, including the employee’s income, the value of the car, and the number of business miles driven.
Mileage and Tax Liability
- Mileage Allowance: The employer reimburses the employee for business miles driven at a set rate per mile.
- Advisory Fuel Rate: HMRC publishes advisory fuel rates for different types of vehicles, which can be used to calculate the taxable value of fuel for private use.
- Taxable Benefit: If an employee drives their company car for personal use, the taxable benefit is the difference between the car’s value and the amount of business miles driven multiplied by the advisory fuel rate.
The taxable benefit is added to the employee’s income and taxed at their marginal tax rate.
Example Calculation of Tax Liability
| Factor | Value |
|---|---|
| Car value | £25,000 |
| Business miles driven | 10,000 |
| Advisory fuel rate (petrol) | 52p per mile |
Taxable benefit = £25,000 – (10,000 x 52p) = £12,200
Assuming the employee is a higher-rate taxpayer (40%), their tax liability on the company car allowance would be:
£12,200 x 40% = £4,880
Tax on Company Car Allowances
If you receive a company car allowance, it’s essential to understand the tax implications. Here’s a comprehensive guide to help you calculate the tax you’ll pay on your allowance:
Tax-Free Thresholds
The amount of tax you pay on your company car allowance depends on the value of your car. There are tax-free thresholds that vary based on the CO2 emissions of your vehicle:
- For cars with CO2 emissions of 0g/km (electric vehicles), the tax-free threshold is £7,000.
- For cars with CO2 emissions between 1-50g/km, the tax-free threshold is £3,000.
- For cars with CO2 emissions above 50g/km, there is no tax-free threshold.
Calculating Your Tax
To calculate the tax you’ll pay on your company car allowance, follow these steps:
- Determine the value of your car. This is usually the manufacturer’s recommended retail price (MRRP) or the market value of the car.
- Calculate the applicable tax-free threshold based on your car’s CO2 emissions.
- Subtract the tax-free threshold from the value of your car.
- Multiply the remaining amount by the appropriate tax rate. The applicable tax rates are:
| CO2 Emissions | Tax Rate |
|---|---|
| 0-50g/km | 20% |
| 51-100g/km | 25% |
| 101-150g/km | 30% |
| 151-170g/km | 35% |
| 171-190g/km | 40% |
| 191g/km and above | 45% |
BIK Calculations: How They Determine Your Tax Bill
When you receive a company car allowance, you’ll need to pay Benefit-in-Kind (BIK) tax on the value of the car. The amount of tax you pay will depend on several factors, including:
- The list price of the car
- The CO2 emissions of the car
- The percentage of business use
The BIK percentage is set by the government and is different for each type of car. The percentage is multiplied by the list price of the car to give you the taxable value. This value is then used to calculate your BIK tax bill.
For example, if you have a company car with a list price of £30,000 and CO2 emissions of 120g/km, your BIK percentage would be 20%. This means that the taxable value of your car would be £6,000 (£30,000 x 20%).
Your BIK tax bill would then be calculated by multiplying the taxable value by your income tax rate. For example, if you’re a basic rate taxpayer, your BIK tax bill would be £1,200 (£6,000 x 20%).
| CO2 Emissions (g/km) | BIK Percentage |
|---|---|
| 0-50 | 0% |
| 51-75 | 7% |
| 76-90 | 13% |
| 91-105 | 19% |
| 106-120 | 20% |
| 121-135 | 25% |
| 136-150 | 29% |
| 151-165 | 32% |
| 166-175 | 33% |
| 176-190 | 34% |
| 191+ | 35% |
Understanding P11D Forms for Company Cars
P11D forms are used by employers to report the value of benefits provided to employees, including company cars. The value of the car is calculated based on a number of factors, including the car’s list price, the CO2 emissions, and the employee’s personal mileage. The value of the car is then added to the employee’s salary and taxed accordingly.
There are two main types of company car allowances:
- Fixed allowance: This is a set amount that is paid to the employee each month, regardless of how much they use the car for business purposes.
- Variable allowance: This is an allowance that is paid to the employee based on how much they use the car for business purposes. The allowance is typically calculated as a percentage of the car’s value.
The tax treatment of company car allowances depends on the type of allowance and the employee’s personal mileage. If the employee uses the car for more than 50% of their business mileage, then the allowance is not taxable. However, if the employee uses the car for less than 50% of their business mileage, then the allowance is taxable. The amount of tax that is payable depends on the value of the car and the employee’s tax bracket.
| Allowance Type | Tax Treatment |
|---|---|
| Fixed allowance | Taxable if employee uses car for less than 50% of business mileage |
| Variable allowance | Taxable if employee uses car for less than 50% of business mileage |
Thanks for sticking with me on this tax excursion! I know car allowances and tax implications can be a bit like navigating a maze, but hopefully, this article has shed some light on the matter. If you have any more tax questions or just want to chat cars, feel free to drop by again. I’m always happy to help fellow motorists make sense of the road to financial clarity. Until next time, drive safely and remember, taxes are not forever – just like that pesky monthly car payment!