Finance

Taxes You’ll Have To Pay On Employee’s Company Cars

Allison S Robinson | 31 January 2022 | 2 years ago

Taxes you'll have to pay on employee's company cars

Salary packages are like a badge of honour to some employees with much comparing of perks and add-ons with their friends. Without a doubt, company cars are a big attraction in packages, but with those talent-magnets comes complex tax regulations ‒ in the UK at least. Today we are wading through the multi-faceted web that you must use as part of your calculations of taxes you’ll have to pay on employees’ company cars – this covers emission, salary and car value factors.

The car as a perk

The perk of a company car is not everyone’s cup of tea as some employees from the newer generations are choosing electric bikes, scooters, WFH (work from home) and digital nomad options instead of a car. Having said this, however, fleet sales are still a material portion of new car sales figures in the United Kingdom’s vehicle market ‒ up to 50% in fact.

The 50% includes delivery vehicles as well, but a large portion is company cars for the combined use of minimal personal travel plus a majority use for business travel. In surveys done by Škoda United Kingdom and a general regional survey done with Northern Ireland companies, company cars are still ranked as a popular salary package perk with up to 66% of employees.

As with all things labelled perk, profit or pay, HMRC snips off the edges for the safekeeping of you and your country. The company car is defined as a Benefit-in-Kind and attracts an array of deductibles based on various factors. The first factor is the tax rate, which is selected based on your salary level. The next factor is the value of the car chosen, and finally, there is another percentage applied based on the carbon dioxide emissions.

Tax category

As a company car is not solely used for the collection and delivery of stock, nor is a staff shuttle that has journeys starting and terminating at the work premises, the HMRC categorises them as a specific perk: a Benefit-in-Kind (BiK). The assigning of these vehicles to this category implies that employees are the recipients of a benefit that can equate to a monetary benefit, and it is a contractual partial payment of the employee’s salary. So whilst it is not part of the money transaction called ‘salary’, it is still a payment towards the services you render to the company as an employee. It is, therefore, taxed by HMRC, but it does not have the same tax formulas applied as it is a different financial vehicle ‒ no pun intended. The tax deductions made, against the benefit of a company car, are processed at source just like your salary tax deductions, NI, etc.

The employee’s company car tax calculation

The deduction made, based on the company car tax calculations, has quite a few variables in its makeup.

Firstly, the P11D value of the vehicle is ascertained. This is reached by adding up the:

  • Manufacturer’s list price for the vehicle
  • The cost of delivery
  • VAT
  • Optional extras
  • Excluding road tax
  • Excluding first-year registration fees
The P11D is then multiplied by the BiK rate based on the BiK band it aligns to. The BiK band is allocated subject to the CO2 emission levels of the vehicle, as published by the manufacturer. As we all know, some manufacturers have severely undeclared emissions in the past, but that will not backfire on you as any losses are claimed against manufacturers via the overall fines levied in the court rulings.

As you can deduce, the BiK band policy is to inspire Joe Citizen to seek out low carbon emission options when researching cars with a heavy preference placed on electric cars. Of course, public transport, walking, cycling, electric scooters and carpooling are even more eco-friendly, so ethical companies should be inventing employee incentives to encourage the choice of these alternatives.

Based on current government policy, the taxes you’ll have to pay on employees’ electric company cars with zero emissions is extremely low, regardless of salaries and salary packages.

Nitrogen Oxide

As you would expect, the high-flyers earning salaries with many zeros and driving lavish, CO2-belching cars will pay the most tax. In addition to the CO2 emissions tax, there is also a nitrogen oxide (NOx)  emission tax. Another tax to be aware of is the penalty levied against older cars with diesel engines. This penalty tax surcharge is not levied against the older petrol engine cars.

To put this overwhelming list into a tangible financial view, here is an example:

  • Joe Citizen’s salary is positioned into the 20% tax bracket.
  • Mr Citizen’s car is positioned in the 25% Benefit-in-Kind band.
    • Multiple the car value by 25%
    • Example car value is twenty thousand pounds
    • BiK value, therefore, is five thousand pounds
  • Mr Citizen will, therefore, pay 20% of five thousand pounds as the BiK tax per annum.
    • GBP 5,000 x 20% = GBP 1,000
As government policies change and HMRC publishes many updates on a regular basis, it is advisable that you consult with an accountant when calculating taxes to ensure the latest rates and regulations are applied.

As a business knowledge hub, Business Advice has always advocated using a finance professional for business finance strategy and taxation calculations.

Related tax changes 2020/2021

The Benefit-in-Kind rates for the 2021/22 Financial Year are based on the emission tests published under the World harmonised Light vehicle Test Procedure (WLTP). These tests put forward more stringent assessment standards, the old NEDC tests, against which to measure new cars.

These new standards raise the test to a level that more closely resembles real-world scenarios. Due to this, the WLTP testing standards have impacted the CO2 (carbon dioxide) emissions levels stipulated in the NEDC regulations. As the levels in those regulations rise, so do the BiK percentage rates.

The introduction of the World Harmonised Light Vehicle Test Procedure has resulted in two sets of BiK rates being applicable. The WLTP tests were introduced to assist in assessing the specifications of new types of vehicles. The existence of a dual set of rates does make for a fairer assessment overall; however, it also makes taxation more complex. As tax goes, nobody ever expects it to be simple or uncomplicated, but BiK is certainly a test of Joe Citizen’s patience.

The way to apply these two systems is as follows:

  • For vehicles registered before the 6th of April 2020, the BiK calculations must be processed using the NEDC-correlated rates.
  • For vehicles registered after the 6th of April 2020, the WLTP tests apply; hence the BiK rates that are applied will effectively lower the taxation by 1%. This is because the WLTP pushes up the emissions to around 20% higher.
However, if the company car has a diesel engine, the assessment is done using the RDE2 regulatory section of WLTP regarding related emissions. If the engine does not meet those regulations, the BiK penalty fee is 4%. And to add to the many layers of taxation, there is a sub-category to this as well:

  • Non-RDE2 diesel hybrids engines do not attract this 4% penalty.
To turn all this information into tangible numbers, here is a test scenario:

DIESEL CAR
CO2 emissions calculation results in 121 grams per km
If RDE2 compliant If not RDE2 compliant
And registered before 6 April 2020 And registered before 6 April 2020 If registered after 6 April 2020
RELEVANT BiK RATE = 29% RELEVANT BiK RATE = 33% RELEVANT BiK RATE = 28%

What about electric cars?

Full electric cars were not included in the BiK regulation in the 2020/21 financial year. They will be included in the current period (2021/22) and will attract a BiK rate of 1%, which will increase in the following financial year to 2%.

The employees who select an electric car as their company car will benefit from thousands of pounds in savings compared to the tax paid on diesel-engined vehicles.

RDE2 and diesel cars

If an existing company car is an older diesel car, it might not meet the RDE2 assessment standards within the WLTP. Therefore, the car would attract an additional 4% on top of the diesel BiK rate.

Pure electric versus hybrid cars

Now is a good time to be spending time researching pure electric vehicles as a company car. Another good option is a hybrid of petrol and electric engines.

Electric vehicles consistently attract the best BiK rates. Plug-in hybrid electric vehicles (PHEVs) do not get the same low tax rate, but it is still lower than other options. A PHEV car will use batteries for powering the electrical portion of its engine (which should be used in the majority for around-town driving). It will combine that with an internal combustion engine (ICE) that burns fuel (e.g. petrol). Hydrogen engines have not been addressed because at this stage they are predominantly utilised in lorries or other larger vehicles.

You can expect an average PHEV to achieve a distance of approximately twenty-five miles on one full charge without using the backup internal combustion engine. The latter only kicks in if a high rev rate is needed (as in the scenario of overtaking another vehicle). A twenty-five mile trip on a battery is predicted to emit forty-nine grams of CO2 per kilometre. 1 mile is 1,60934 kilometres, therefore 25 miles is 40.2335 kilometres. The PHEV carbon footprint for a 25-mile trip works out to 1.972 kgs of CO2 emissions. The 2021/22 Bik rate for a car with those emissions would be 13%.

In comparison, Joe Citizen’s petrol car could record carbon emissions of 132 grams of carbon dioxide per kilometre. This would equate to 5311 grams of carbon emissions ‒ a 270% increase on PHEV emissions. Your choices do make a difference.

According to Auto Express, a regular petrol car that was registered after 6 April and subject to WLTP tests might emit 132g/km of CO2, attracting a BiK rating of 30%. On the other hand, an RDE2-compliant diesel vehicle might emit 120g/km, resulting in the owner being accountable for a 28% BiK rate.

Does WLTP affect road taxes? 

Road tax is affected by WLTP just as the taxes you’ll have to pay on employees’ company cars. Previously, vehicle excise duties were calculated using the NEDC assessment factors for CO2 readings. This change occurred in the last financial year.

The BiK rates, and resulting penalty fees, are to be paid annually per company car. The vehicle excise duty (or road tax as it is commonly called) is only calculated on the published CO2 emissions in the first year. For each year thereafter, employers can apply a flat rate.

As the first year is an anomaly compared to the ongoing annual road tax flat fees, most car dealerships include the first year annual road tax amount in their retail price as a sales incentive. This gives them a “pay this amount and drive out the showroom” offer.

Because of this first year anomaly and price-cladding, the impact of the WLTP on the road tax is mostly unnoticed.

What the impact does calculate out to, for interest’s sake, is shown in the following example:

  • Example car: diesel engine
  • Carbon footprint: 115 gm per kilometre o fCO2 emissions
  • Compliance: non-RDE2 compliant
  • First-year tax: Two hundred and twenty pounds
    • Tax on an RDE2-compliant diesel: One hundred and eighty pounds
    • Tax on a petrol version of this vehicle: One hundred and eighty pounds

Company car tax glossary

As explanations relating to tax and regulations are well composted with acronyms, we are adding in a quick reference glossary to assist you long term.

Company Car Tax Glossary
BiK This means Benefit-in-Kind tax, i.e. a tax on a non-monetary payment made to an employee for the employee’s services.  A company car is seen as compensation for services rendered, like a barter deal. It is not money, but it carries a value that can be used for bartering. BiK relates specifically to company cars.
CO2 This is the HMRC way of writing the chemical formula CO2. which represents carbon dioxide. CO2 is a pollutant expelled by certain vehicles, viz. Those specifically with petrol and diesel-burning engines. CO2 is a clear gas that has an acidic PH. It’s is 53% denser than air. When measuring the number of particles in the air (pollutant), the unit of measure used in the UK is g/km – grams per kilometre (The USA uses grams per mile or gallon). The carbon emissions penalty is calculated based on the published CO2 of each vehicle.
BiK Rate The BiK rate is a factor that selects the portion of a company car’s value for taxation purposes. As you would expect, the higher the CO2 emissions from a vehicle, the greater the value portion for taxation purposes.
NEDC This acronym stands for the New European Driving Cycle. This name refers to the testing standards and procedures used for measuring carbon emissions as well as the fuel economy factor of a vehicle. Its usage has been replaced by the WLTP protocol as the NEDC protocol was deemed incomplete and resulted in unfair penalties on some vehicles.
WLTP This is the new testing protocol, and its full name is the Worldwide Harmonised Light Vehicle Test Procedure. It is defined as a “new economy” emissions testing protocol. It applies to any vehicle (new) that is registered from the 1st of September 2019.
RDE2 This stands for Real Driving Emissions, Step 2. This testing is done on the road and is added to the assessments done in laboratories using the WLTP protocol. Step 2 has introduced tougher parameters for carbon emissions than Step 1.
Diesel Surcharge This is a surcharge that deals with vehicles that are not compliant with the Real Driving Emissions, Step 2 protocol within the WLTP test. These surcharge levies and an additional 4% onto the new BiK rates.

Conclusion

There are many different ways to help our planet repair itself and contribute ethically to the economy. Choosing a low carbon emissions vehicle is one of those options you can use instead of aiming for status badges via gas-guzzling luxury cars. As we always recommend, run your choices past your accountant and ensure you make the best financial decision for your business.

Topic

Finance

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