Companies give benefits to their employees by different means. Some are through a salary increase, while others are a benefit in kind or BIK. The latter is non-cash, but since it has a monetary value, it also makes it taxable. The employee who receives the BIK is the one to pay the tax. While the company is not the one paying for it, it still needs to pay the Class 1A National Insurance, which is mandated by law. The guideline for taxing company cars will change this year, and it will start in April.
Taxing a company car
When employees use a vehicle that is provided by the company, it is considered as a non-monetary benefit. However, the user will still be taxed by HMRC (Her Majesty’s Revenue & Customs), which is the tax authority in the UK. If you are using a company car, there are various things considered when computing the tax that you will pay, including the total value of the vehicle, the tax rate of the company car, and your personal tax rate.
The total value of the car includes everything that affects its value like its RRP or recommended retail price, VAT and other extra features such as sensors and paint. Your personal tax rate depends on your annual income, and it can be 20% to 50%. The company car tax rate depends on the CO2 emissions of the vehicle. The lower the emissions, the lower the tax rate too.
You can compute the company car tax by multiplying the car’s total value by the car tax rate, then multiplying the product by your personal tax rate. Below is a sample computation:
£16,000 (car’s total value) x 24% (car tax rate) x 40% personal tax rate = £1,536 per year
Company Car Tax Changes in 2020
HMRC used the New European Driving Cycle or NEDC for measuring the CO2 emission of cars for the past years. However, change is coming because another standard called the Worldwide Harmonised Light Vehicle Test Procedure or WLTP will be used starting in April 2020. It offers a more extensive test giving more reliable results, although it can cause the CO2 emission rate of the vehicles to be higher. It also means that the tax rate will increase. Some of the features of WLTP are:
- Distances for test driving is longer
- Driving behaviour is more realistic
- Drive power and speed are higher
- Ambient temperatures are more realistic
- Driving on different types of roads
What companies can do
Employers who are looking to purchase a company car should consider buying one that offers lower emissions. Not only will it be beneficial to the environment, but to their employees too. If the CO2 emissions are low, the user will also pay a lower amount for the car tax. The amount of the Class 1A National Insurance that the company will pay also depends on the car benefit and its fuel usage, so choosing the right vehicle will also affect the price that the business will pay. Another option is to go for a car lease instead, as you will get tax relief.
Working with the tax computation in your company must be accurate. The right tax accounting software can help you with that. One that is cloud-based will ensure that everyone authorized to handle this task will have convenient access to it.