Company cars are taxed in the same manner as other Benefits-In-Kind that are given to employees. Through this article, we will explore in detail the ways through company car tax may be reduced by indic=viduals. Additionally, we will also discuss certain vehicle and road laws to be kept in mind by those who frequently use or drive a car.
How Do I Avoid Paying Tax On A Company Car?
While there are no loopholes that can help someone avoid having to pay tax on a company car, there are certain choices one can make to reduce their car tax.
When a non-cash benefit such as a company car is given to an employee, the taxable amount depends on a number of factors, which include the following:
- CO2 emissions of the vehicle
- The year of make and model of the vehicle
- The list price of the vehicle including accessories; less capital contribution
- The type of fuel it consumes
- Frequency of use of the vehicle
Since you pay car tax based on the value of the car and its CO2 emissions, if your company car is not highly-priced or has a low P11D value and has low CO2 emissions, you can reduce your car tax bill. Similarly, if you drive a hybrid or electric car, you may have to pay little to no car tax.
The value of your company car is added to your salary before taxes may be calculated; which means your Personal Allowance of £12,750 will first be deducted before taxes are applied; and that too at a rate of 20 per cent on the amount in excess of £12,750.
Therefore, depending on whether your income tax band is 20%, 40% or 45%, you will pay HMRC an estimated percentage of £7,500 based on the rate of income tax you pay. This means that your car tax may either be £1,500, £3,000 or £3,375 per year respectively.
If you fall under any of the below categories, you may be exempt from paying company car tax:
- You are one of the partners in a partnership based firm
- You are one of the partners of a Limited Liability Partnership
- You are the sole proprietor of a personal business
- Your company car has been adapted due to mobility reasons
- Your car is used only for official work and not for personal use
In most of these cases, you will be expected to leave your company car at the office rather than take it home. Using a car to commute to and from work will be considered as personal use by the HMRC.
How Is A Company Car Taxed?
To calculate the amount of tax due on your company car, the first factor of consideration will be its monetary value.
Being a Benefit In Kind like accommodation, mileage allowance, subscriptions to professional bodies, a company car is also a taxable non-cash benefit enjoyed by many employees. When tax is calculated on a company car, its taxable value is taken into consideration. This can be done in either of the following two ways:
- Calculate the cash equivalent of the benefit and add it to the salary of the employee. Then tax the amount through payroll.
- Use a P11D form to declare the car’s value versus the taxes paid to date.
The amount of tax due on a car is calculated by taking the following factors into consideration:
- The date of registration
- The tax year
- Fuel type
- The vehicle’s approved CO2 emissions
- P11D value
- List price (including VAT and accessories)
- Employee capital contributions (if any)
Who Has To Pay Road Tax In The UK?
Anyone with a roadworthy vehicle in the UK is required to pay road tax (also referred to as car tax, vehicle tax or road fund license. This is a mandatory, annual payment enforced by the Driver and Vehicle Licensing Agency. The amount due on a vehicle owner depends on the type of vehicle they drive as well as the level of CO2 emissions from their car.
The following vehicles are exempt from road tax:
- Cars used by a disabled person
- Disabled passenger vehicles
- Electric vehicles
- Historic vehicles
- Mobility scooters and powered wheelchairs
- Mowing machines
- Steam vehicles
- Vehicles used for agriculture, horticulture and forestry
You can check vehicle tax online to confirm if your car has been taxed.
How Much Road Tax Do I Have To Pay In The UK?
Road tax or Vehicle Excise Duty in the UK is calculated on the basis of a few factors including the engine size and CO2 emissions of the car.
However, the UK road tax system is divided across two separate rates. The first-rate applies during the first year of a car on the road when its CO2 emissions are also accounted for while calculating the tax rate. It may range from £0 for zero-emission cars to £2,245 for cars that emit 255g/km or more.
From the second year onwards, the CO2 emissions will not account for road tax, rather the original cost of the car will be considered for calculations.
Cars that are valued at or above £40,000 will be taxed a further £335 annual supplement that runs for five years. After this time-lapse, they will be taxed at the current tax rate applicable during the tax term.
The current (2021-22) road tax is set at a flat rate of £155. This is an increase from £150 in the 2020/2021 financial year) to adjust for inflation. There’s a £10 annual discount for alternatively fuelled vehicles such as hybrids, mild hybrids and plug-in hybrids. Therefore, their owners pay £145 annually.
What Are The Legal Obligations Of Drivers In The UK?
Legal obligations of drivers in the UK include the following:
- the vehicle should be registered with DVLA
- the vehicle must be roadworthy
- the owner must have paid their current vehicle tax
- the owner must have a current mot certificate
- the owner must have a minimum of third party insurance
Car owners are also required to inform the DVLA in case of the following:
- a change in the owner’s name or gender
- new contact details including address
- in case of a medical condition of the driver
- major alterations to the vehicle
- sale of the vehicle
How Is Car Tax Paid In The UK?
Car owners receive a reminder from the Driver and Vehicle Licensing Agency around three weeks before their vehicle tax is about to expire. This is called a V11 reminder. This letter can be taken to the nearest local post office which has car tax facilities and used as a reference to pay your car tax. If a vehicle owner loses their V11 letter, they can use their 11 digit reference number from their logbook known as V5C.
To pay your car tax online from the post office, you will need the following documents;
- Your V11 letter
- An MOT test certificate
- The amount of payment mentioned in the V11 letter
If you have misplaced your V11 letter or your V5C, your car tax can still be renewed through the local post office.
At this time, you should also apply for a new Registration Certificate using a V62 application form A for £25
If a vehicle owner fails to pay their car tax, they may face an initial fine of up to £80 reminding you to clear your tax dues within 28 days. If you fail to pay the fine within the given time, this fine can increase to up to £1000 and the defaulting party be taken to court.
However, if you do not intend to run your car on public roads, you are not required to pay your car tax. Instead, you should apply for Statutory Off Road Notification (SORN) through your local post office dealing with car tax.
Through this article, we’ve come to learn that while there is no deliberate avoidance of car taxes (or any other taxes for that matter), there are certain steps that individuals can take in order to reduce the amount of tax that they will have to pay on a company car. The two most important factors in this regard are, the P11D value of the car and its CO2 emissions. The lower the value as well as the CO2 emissions of a car, the lower amount of car tax can you expect to pay and vice versa.
FAQs: How Do I Avoid Paying Tax On A Company Car?
How can I reduce my company car tax?
The two most important factors in calculating company car tax are the P11D value of the car and its CO2 emissions. The lower the value as well as the CO2 emissions of a car, the lower amount of car tax can you expect to pay. Similarly, if you drive a hybrid or electric car, you may have to pay little to no car tax.
Do I have to pay tax on a company car?
Yes, you have to pay tax on a company car. The value of your company car is added to your salary before taxes may be calculated; which means your Personal Allowance of £12,750 will first be deducted before taxes are applied; and that too at a rate of 20 per cent on the amount in excess of £12,750.
Do I have to pay tax on a company car if I don’t use it for personal use?
If you don’t use a company car for personal use, you will not be required to pay tax on it. This means that you will be expected to leave your company car at the office rather than take it home after work; as using a car to commute to and from work will be considered as personal use by the HMRC.
How much does a company car add to your salary?
The value of your company car is added to your salary before taxes may be calculated. When tax is calculated on a company car, its taxable value is taken into consideration. This can be done either by calculating the cash equivalent of the benefit and adding it to the salary of the employee, then taxing the amount through payroll or by using a P11D form to declare the car’s value versus the taxes paid to date.
How is tax worked out on a company car?
The amount of tax due on a car is calculated by taking into consideration its date of registration, the tax year, fuel type, the vehicle’s approved CO2 emissions, its P11D value, its list price (including VAT and accessories)and employee capital contributions (if any). The value of your company car is added to your salary before taxes may be calculated; which means your Personal Allowance of £12,750 will first be deducted before taxes are applied.