There are certain individuals who may prefer to opt for a car allowance to be paid to them every month as compared to being given a company car. Through this article, we will assess how you can calculate the amount of tax due on your car allowance as well as compare it with an estimated calculation of car taxes. Additionally, we will also discuss the details of car taxes and the obligations of drivers while on a public road.
How Can I Calculate The Tax On My Car Allowance?
Your car allowance is simply added to your existing income (after deduction of Personal Allowance) and your tax band is applied depending on whether you belong to the basic, higher or additional tax rate band.
This means that there is no amount of tax due on individuals earning £12,750 (or less) as this is the rate for Personal Allowance so that individuals may be able to pay for their living expenses.
Incomes above the minimum cap of £12,750 are taxed at an incremental rate of 20 per cent to 45 per cent depending according to the bands detailed below:
- 0 per cent income tax when income is up to £12,570
- 20 per cent income tax when income is between £12,571 and £50,270
- 40 per cent income tax when income is between £50,271 and £150,000
- 45 per cent income tax when income is above £150,001
Depending on the nature of the work that an employee is required to perform as well as their position in the company, the amounts for car allowances may vary across an organisation. This is the reason why car allowances may range anywhere between a couple of hundred pounds to in excess of £1,000.
This is the reason why in certain cases, the addition of a car allowance may increase the income tax band of an employee.
In the same manner, should you be given a company car and not an allowance, the value of your company car is added to your salary before taxes may be calculated. This 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.
How Can I Reduce Tax On A Company Car?
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.
However, 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
Whether an employee is granted a car allowance or given a company car, the monetary value of each one is added to their income and once the amount of personal allowance is deducted, there is a certain amount of tax due upon them. This amount may vary across individuals as well as organisations as it is derived from the taxable income of each employee. While most times a car allowance is considered to be a more feasible option as compared to a company car, sometimes it may increase one’s income tax band, thus increasing the percentage to be charged on their income for a tax deduction.
FAQs: How Can I Calculate The Tax On My Car Allowance?
How much tax do you pay on car allowance?
Your car allowance is simply added to your existing income (after deduction of Personal Allowance) and your tax band is applied depending on whether you belong to the basic, higher or additional tax rate band. This means that there is a 20 per cent income tax when income is between £12,571 and £50,270, a 40 per cent tax when income is between £50,271 and £150,000 and a 45 per cent tax when income is above £150,001.
How is a car allowance calculated?
Your car allowance is calculated by simply being added to your existing income after deduction of Personal Allowance. Next, your tax band is applied depending on whether you belong to the basic, higher or additional tax rate band. Therefore, depending on whether your income tax band is 20%, 40% or 45%, you will pay HMRC a fixed amount of tax based on the sum of your car allowance and salary.
Do you pay more tax with a car allowance?
You do pay more tax with a car allowance as compared to paying tax on just your income as the amount is added to your monthly income. However, in comparison to paying taxes on a company car as compared to a car allowance, you might be paying fewer taxes in the latter case.
Do you get taxed on car allowance in the UK?
Yes, you do get taxed on car allowance in the UK. Your car allowance is first added to your existing income. Then there is a deduction of Personal Allowance. Finally, your tax band is applied to the final amount; depending on whether you belong to the basic, higher or additional tax rate band.
Is car allowance part of the salary?
Car allowance is an added income to your basic salary. It appears on your payslip and remains taxablE by HMRC.