This guide provides an overview of the tax implications of company cars for both employees and employers in the United Kingdom. It also includes a worked example to illustrate the calculations involved.
In the UK, a company car refers to a car owned by an employer and made available for the use of a specific employee for both business and private purposes. The car remains the property of the company.
The equivalent cash value of the benefit provided by a company car is subject to taxation as a Benefit in Kind (BiK) for the employee. Additionally, the employer is required to pay Class 1A national insurance contributions at a flat rate of 13.8% on the cash equivalent value.
A BiK arises when a car is made available to an employee or director for their private use without transferring ownership based on their employment. This charge encompasses most of the car’s running costs, excluding fuel. The cash value equivalent of this charge is calculated in the following stages:
List Price: This refers to the price published by the manufacturer when the car was first registered. In most cases, the list price differs from the actual purchase price. This applies to both new and second-hand cars. List prices can be obtained online or by consulting the supplier. The list price includes delivery and VAT.
Accessories and Optional Extras: These are non-standard features that come with the car when it is initially made available to the employee. It includes any options added after the initial availability, provided the cost exceeds £100. This also includes delivery, VAT, and fitting charges.
Employee Capital Contributions: This refers to one-time payments made by the employee towards the aforementioned costs. For the purpose of calculating the cash equivalent value, these contributions are capped at a maximum of £5,000, even if they exceed this limit.
Emissions: A certain percentage is assigned based on the car’s level of CO2 emissions. These figures can be easily obtained online or from the supplier. The percentage rates are available here [provide a hyperlink]. Please note the following considerations:
Availability: The benefit in kind charge is calculated based on the number of days in the tax year during which the car was available for the employee’s use. Whether the employee actually used the car or not is not taken into account.
Employee Private Use Contributions: Only when the employee is obligated to contribute a specific amount towards the use of the car is it deducted when calculating the amount assessable as a cash equivalent.
The BiK cash equivalent value is determined using the following formula:
((List Price + Accessories and Optional Extras – Employee Capital Contributions) x %Emissions x Availability) – Employee Private Use Contributions.
Let’s consider a company car with a list price of £25,000, £2,000 worth of accessories and optional extras, £1,000 employee capital contributions, 120 g/km CO2 emissions, and 300 days of availability in the tax year. The employee is required to contribute £500 towards the private use of the car.
List Price + Accessories and Optional Extras – Employee Capital Contributions:
£25,000 + £2,000 – £1,000 = £26,000
%Emissions: Assuming 120 g/km CO2 emissions for this car, we can refer to the relevant percentage rate based on the provided link.
Availability: Since the car was available for 300 days in the tax year, we consider this figure.
Employee Private Use Contributions: As the employee contributed £500, we deduct this amount.
Using the above values, the BiK cash equivalent value can be calculated using the formula mentioned earlier.
Note: It is essential to consult HM Revenue & Customs or a tax professional for accurate and up-to-date information on company car taxation in the UK, as rules and rates may change over time.