An important consideration for you to make when offering company cars is whether your employees will be able to use the vehicle for their private use. For most employees and businesses this is the best option, as employees do not want to be responsible for a business vehicle and their own personal vehicle and have difficulties with practicalities like parking. On a business side as well, if the company car is your employees’ main vehicle they are more likely to feel a personal responsibility for it and take better care of the vehicle.
Company car tax is also known for the employees as a Benefit in Kind (BIK) tax.
Company Car Tax for Businesses Explained
As a company car that is used for personal travel is viewed as a benefit for the employee, as their employer you will need to pay Class 1A National Insurance Contributions (Class 1A NICs).
The amount you will need to pay is calculated as a percentage of the cash equivalent of the benefit. This cash equivalent figure will be the same as the one that you report on the P11D expenses and benefits, or substitute.
Special rules apply to a car provided through salary sacrifice or other remuneration arrangements and you can find out about these here.
For a benefit like a company car this contribution will need to be paid annually by the 22nd of July for the previous tax year, or by the 19th if paying via post.
How is Company Car Tax Calculated?
The total amount you will pay for can be calculated by:
Adding together each cash equivalent amount (if there are multiple Class 1A NICs) to get a single figure and then multiplying the total figure by the Class 1A percentage rate.
The percentage rate for Class 1A NICs is worked out by using the Class 1 NIC rate for the tax year which the benefit is used.
The rates for 2021/22 are currently at 13.8%. You can see a full breakdown of the rates on the government’s website here.
Company Car Tax for Employees
As they are receiving the benefit your employees will also need to pay a company car tax.
This is calculated using three factors; the amount of CO2 emissions that the vehicle emits which gives the company car tax rate, the P11D of the vehicle, and their personal tax rate.
To work out the amount you will need to multiply the P11D by the car’s company tax rate, which will give you the BIK amount. Then you will need to multiply the BIK amount by the employee’s personal tax rate which will give you the amount they have to pay for that tax year.
We’ve got this guide which is designed to explain in detail how the company car tax is calculated for them to help both you and your drivers understand the tax implications for them.