company car tax - benefits in kind

with the vehicle tax system now based on exhaust emissions, what are the implications for company car drivers?

company car tax - benefits in kind

A company car can be a great perk, but it doesn't come for free as the taxman takes a proportion of your earnings for the privilege. Since 2002, company car tax has been based on the list price of the car, its options and its recorded carbon dioxide emissions, rather than the number of miles covered, in a bid to encourage drivers to opt for more eco-friendly vehicles.

How much tax you pay for your company car now depends on three variables: the P11D cost of the car (this is its list price plus the cost of any options, but minus the on-the-road charges and any capital contributions you make towards the vehicle), the amount of CO2 that it emits and your personal income tax band.

Once you've got these pieces of information you are then in a position to calculate how much your chosen car will cost you each month in additional tax.

Multiply the P11D value of the car by the benefit-in-kind percentage that it's subject to based on its CO2 output. HM Revenue and Customs have applied a percentage to each model in a manufacturer's range. This is the proportion of the car's value that you'll be taxed on based on your personal income tax band, so multiply that by 20%, 40% 45% or 50% as appropriate.

So, for example, if the car you have chosen has a P11d value of £20,000, has a 25% tax band rating and you're a higher rate tax payer at 40%, your annual tax liability is calculated as follows:- £20,000 x 0.25 x 0.40 = £2,000.

If you don't want to pay anything at all, you'll need to get a fully electric battery-powered car. These are totally exempt from the charges until 2015. Cars emitting less than 75g/km will be subject to tax based on 5% of their value until 2015.

The tax laws and the banding structures are changing all the time so it's well worth looking ahead and making sure that there isn't new legislation that's about to come in and send all your calculations up the spout. In the end, it might be more cost-effective for a lot of people to opt out of their company car scheme altogether. Many firms will offer a cash alternative and taking the money might be a more sensible choice for some people. Again, it is very much down to individual circumstances.