If there's a third certainty in life, it's surely that all matters relating to taxation will be horribly complicated. Company car tax is no exception, and when changes are made to the system on a seemingly annual basis, things can become confusing, to say the least.
Put simply, a car made available to you by your employer that you use for work but which you can also use personally outside working hours, including commuting to and from work, is considered to be a benefit second only to the salary you are paid.
HMRC calls it a benefit-in-kind (BIK), a term it applies to any perk or incentive other than your basic salary that's taxable. Most of us know this tax as company car tax.
How is company car tax calculated?
Many factors contribute to your company car tax bill, but the first is the vehicle’s value, commonly known as its P11D value after the form your employer gives you detailing your various company benefits.
The P11D value is the car’s list price, including options fitted to it, plus VAT and delivery charges but not its first registration fee and road tax. Remember, it’s the vehicle’s list price, not its discounted price, that's considered. Also, there’s no point trying to save money by taking a used company car rather than a new one, because the same calculation applies.
The car’s P11D value is then multiplied by the income tax bracket you fall into (20%, 40% or 45%) and its BIK tax rate. The BIK rate is based on your company car’s official CO2 emissions, the type of fuel that powers it and, if it's a hybrid, its electric-only range.
CO2 is the primary factor here, because the government wants to incentivise us all to drive cleaner cars. The lower the car’s CO2 emissions, the less tax you pay.
Calculating BIK rates and tax charges
The amount of CO2 a car emits is calculated from a series of tests called the World Harmonised Light Vehicle Test Procedure (WLTP). This tough new test was introduced in September 2018 but wasn’t applied to all new cars until 6 April 2020. Between the two dates, some cars were tested under the earlier, less stringent emissions test, called the New European Driving Cycle (NEDC).
Cars tested under the NEDC test generated more flattering CO2 emissions figures, so to make things fairer between them and WLTP-tested cars, those registered before 6 April 2020 have so-called NEDC-correlated BIK rates; while from the tax year 2021/22, those registered from 6 April 2020 have 1% deducted from their BIK rate. To avoid confusion, the rates are displayed on different tables (see the BIK rate tables below).