Navigating Company Car Tax Loopholes and Reducing Tax Charges

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Employees often view company cars, or the use of any employer-owned vehicle, as a valuable perk that adds personal benefits to specific roles. However, calculating company car tax can leave many people facing unexpectedly large tax bills. As a result, informed employers and employees seek smart company car tax loopholes to ensure they receive a good deal without putting undue strain on their finances.

This comprehensive guide will cover various aspects of company car tax in the UK, from understanding how it works and its implications on different types of vehicles to exploring potential tax-saving strategies. We’ll also address frequently asked questions to help you avoid surprisingly large tax charges and make informed decisions regarding your company car arrangements.

Understanding Company Car Tax in the UK

A company car is any vehicle allocated to staff by their employer as a company benefit or perk in addition to their annual salary. To be officially classed as a company car, employees must be permitted to use the vehicle in their personal time and within normal working hours, for commuting, and for engaging in official company business. HMRC views this asset as a taxable perk.

Calculating Company Car Tax

The amount of company car tax an employee is expected to pay will depend on several determining factors, including:

  • Expected annual income
  • The CO2 emission bracket of the car
  • The value of the vehicle as described in its P11D Form (% of the car’s official price)

Additional charges may be accrued depending on the type of fuel the vehicle uses. For example, diesel vehicles are often affected by surcharges due to emitting higher levels of CO2, while electric cars may be exempt from tax in some districts and situations.

CO2 Emission Bands and Benefit in Kind (BIK) Rates

To reduce pollution levels across the UK and Europe, all road-worthy vehicles are assigned a CO2 emission band, which greatly affects the Benefit in Kind (BIK) rate all employees driving company cars are expected to pay. CO2 emission bands account for the amount of CO2 released by vehicles in g/km, with tax charges increasing incrementally as this value rises.

Company Car Tax for Different Vehicle Types

  1. Pool Cars: One way to avoid some tax charges aimed at using company cars is to classify the vehicle as a pool car officially. The main difference is that the vehicle will be treated as an employer-owned car loaned to employees only during working hours, with no availability for private use. This results in a reduced BIK rate and less payable tax.
  2. Vans and Pickup Trucks: Company-owned vans will be exempt from company car tax if the vehicle is only used for official business journeys or as a dedicated pool vehicle. Unique to vans, business journeys can include travelling to appointments or temporary workplaces. Small private journeys may also be exempt from company car tax when operating a company-owned van.
  3. Hybrid Vehicles: Hybrid vehicles, which combine traditional fuel engines with electric power, can offer tax savings due to their lower CO2 emissions than solely fuel-powered vehicles. The BIK rates for hybrid vehicles will depend on their specific CO2 emissions and electric-only range.
  4. Electric Cars: Electric vehicles are exempt from paying Vehicle Excise Duty (VED) until 2025, with BIK tax rates fixed at only 2% for the 2023/24 and 2024/25 tax years. Their lower CO2 emissions mean that the expected tax rate for using electric company cars will likely remain much lower than comparable fuel-fed vehicles.

Salary Sacrifice Schemes

Salary sacrifice schemes allow employees to exchange a portion of their pre-tax salary for a non-cash benefit, such as a company car. These schemes can result in tax savings for both the employee and the employer. However, it is essential to carefully consider the overall impact of such schemes on the employee’s net income and the potential loss of other benefits linked to their salary level.

Using a Company Car Tax Calculator

To calculate the unique BIK rate associated with a particular vehicle, you can find the vehicle’s make, model, and fuel type and compare this information to current CO2 bands. Alternatively, you can use an official HMRC company car and car fuel benefit calculator to determine the expected tax liability.

Tips for Lowering Company Car Tax

  1. Choose a low-emission vehicle: Opting for a cheaper vehicle with low CO2 emissions will significantly reduce final company car tax value.
  2. Employee contributions: Having employees contribute to the initial RRP of the car can help lower the taxable benefit.
  3. Restrict private use: Ensuring that vehicles are only accessible to staff within allocated working hours or as a part-time company car will help to keep overall company car tax values low.
  4. Consider optional extras: Some optional extras, such as larger wheels, tow bars, and panoramic roofs, can contribute to increased CO2 emissions and fuel consumption, raising overall tax rates.
  5. Business edition fleets: Some manufacturers offer specific versions of their cars tailor-made for large orders of company vehicles, featuring basic specifications and discounts for bulk orders with a reduced RRP to help minimise resulting BIK rates.
  6. Tax planning strategies: Engage in tax planning strategies to optimise tax savings, such as adopting salary sacrifice schemes, optimising employee allowances, and restructuring remuneration packages.

Working out any vehicle’s company car tax liability can be quite confusing. Still, with the correct information, it’s possible to determine how much tax HMRC will expect and what can be done to lower that value. Choosing low-emission vehicles, operating as pool cars, investing in electric or hybrid cars, and opting for a van or pickup truck if the estimated company car tax exceeds their fixed taxable value are all viable options.

Before finalising any proposed company car plan, please consult with our friendly accountants, use a car tax calculator, or follow the information in this guide to estimate how much tax you’ll be expected to pay. Consider whether any tips we’ve covered can help you lower that value and ultimately avoid unnecessarily large tax charges.

Frequently Asked Questions on Company Car Tax

  1. What is a company car?

An employer provides a company car to an employee as a benefit or perk in addition to their annual salary. To be officially classed as a company car, employees must be permitted to use the vehicle for both personal and business purposes.

  1. How is company car tax calculated?

Company car tax is calculated based on the vehicle’s P11D value (the list price, including VAT and any delivery charges), its CO2 emissions, and the employee’s income tax bracket. The car’s CO2 emissions determine the Benefit in Kind (BIK) rate, and this percentage is applied to the P11D value. The resulting BIK value is then multiplied by the employee’s income tax bracket to determine the company car tax payable for the year.

  1. What are the tax implications of a pool car?

A pool car is a vehicle used by multiple employees solely for business purposes and is not available for private use. As such, pool cars are not considered an employment-related benefit and are not subject to BIK rates or company car tax.

  1. Are electric vehicles subject to company car tax?

Electric vehicles are subject to company car tax but typically have much lower BIK rates due to their lower CO2 emissions. Fully electric vehicles have a BIK tax rate of 2% for the 2023/24 and 2024/25 tax years and are exempt from Vehicle Excise Duty (VED) until 2025.

  1. How can I reduce my company car tax liability?

You can reduce company car tax liability by choosing a low-emission vehicle, having employees contribute to the vehicle’s initial cost, restricting private use, considering optional extras, opting for business edition fleets, or engaging in tax planning strategies such as salary sacrifice schemes.

  1. Are vans subject to company car tax?

Vans are subject to company car tax, but the rules differ slightly from those for cars. Vans have a fixed taxable value of £3,600, and particular business and private journeys may be exempt from tax.

  1. Can I use a company car tax calculator to estimate my tax liability?

Yes, you can use a company car tax calculator to estimate your tax liability based on the vehicle’s P11D value, CO2 emissions, and income tax bracket. You can also use an official HMRC company car and car fuel benefit calculator to determine your expected tax liability.

  1. Where can I find more information on company car tax?

For more information on company car tax, consult a professional accountant or tax advisor, or visit the official HMRC website.

Make Informed Decisions and Save on Company Car Tax

Understanding company car tax and exploring potential tax-saving strategies can significantly impact your finances as an employer and an employee. By considering factors such as vehicle type, CO2 emissions, and usage restrictions, you can make informed decisions that help you avoid excessive tax charges and maximise the benefits of your company car arrangements.

At Mercian Accountants, our experienced team of accountants and tax advisors are here to guide you through the complexities of company car tax and offer personalised advice tailored to your unique situation. Don’t hesitate to contact us for assistance navigating company car tax loopholes and making the most of your company car benefits.

Contact us today to discuss your company car tax needs and let our experts help you make informed decisions and save on your tax bill.