Company Cars and Tax

1. Employee Tax

1.1 Company cars are taxed as a benefit in kind for most employees. There are some special cases.

• Employees earning less than £8,500 a year (including the value of any benefits they receive) are not taxed on the benefit. But directors are almost always taxed, regardless of what they earn
• Pool cars used by more than one employee for their work are not taxed. A pool car must not normally be kept overnight at an employee's home.

1.2 Employees pay tax at their top rate.

• The tax charge is based on an assumed benefit calculated as a percentage of the car's list price. The percentage normally varies between 15 and 35 per cent, depending on the car's CO2 emissions. The higher the emissions, the higher the assumed benefit (effectively the charge) will be.
• For example, in 2008/09 the assumed benefit on a car emitting 210gm of CO2 per kilometre (gm/km) is 30 per cent.Assuming that the list price of the car was £18,000, the tax charge (to a basic rate taxpayer at 20 per cent) would be £1,080 (£18,000 x 30/100 x 20/100).
• From 2008/09, cars with CO2 emissions of 120 gm/km or lower attract a new lower percentage charge of 10 per cent (13 per cent for diesels). There are also discounts for cars run on alternative fuels or alternative technology (see 3.3)
• Diesel-powered cars attract an extra charge of 3 per cent, unless they are Euro IV compliant and were registered before 2006, subject to the same 35 per cent maximum charge.
• The level of CO2 emissions at which a particular charge applies may decline annually.The intention is to persuade businesses to buy more fuel-efficient cars. For 2008/09, the lower threshold (at which the 15 per cent rate applies) has been reduced to 135 gm/km; this will fall to 130gm/km for 2010/11.
• Higher business mileage now has no effect on the tax charge. Nor has the age of the car, except that a special scale charge applies to cars registered before 1998.

1.3 The list price is based on the price published by the manufacturer, importer or distributor, plus delivery charges, tax and VAT (but not vehicle excise duty).

• It also includes the list price of accessories (plus fitting and VAT).
• Accessories worth up to £100, fitted after the car has been delivered to the employee, are excluded. So are mobile phones, equipment necessary to a disabled driver, and equipment necessary to the driver to perform his duties.
• The cost of enabling the car to run on compressed natural gas (CNG) or liquid petroleum gas (LPG) is also excluded.

1.4 Employees provided with a van pay tax if there is any significant private use.

• Since April 2007, employees are taxed on a benefit of £3,000 (so paying tax of £660 at basic rate of 22 per cent).
• If the only private use is travelling between home and work, employees pay nothing.
• If several employees share the same van, the value of the benefit for each employee is reduced on a just and reasonable basis.