How are limited company cars taxed?

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Another perk available as a limited company director is the ability to purchase a company car for the business. This is known as a ‘benefit in kind’ because it’s classed as something above and beyond your basic salary.

You’ll pay tax on benefits in kind if they form part of your employment package. This is because they can be translated into a monetary value.

Working out limited company car tax

If you’re confused by how tax is calculated for your limited company car then you’re certainly not alone! In fact, it’s one of the most common queries we receive. To help clear things up, we’ve created this handy guide.

How is benefits in kind tax calculated?

Benefits in kind are worked out as a percentage of the car’s list price. If you’re an employee or director, you can reduce the amount of tax you pay by contributing up to £5,000 when you buy it. This is then taken off the list price – reducing the amount of tax you’ll be charged.

The percentage you’ll pay depends on how much Co2 is emitted by the car. The lower the pollution, the lower the tax – meaning it really pays to go green!

Here’s how the percentage is worked out:

Car emission level Percentage to be taken
1 - 50 g/km 5% of list price
51 - 75 g/km 9% of list price
76 - 94 g/km 13% of list price
95 g/km 14% of list price
96 - 100 g/km 15% of list price
101 - 105 g/km 16% of list price
106-110, 111-115, 116-120, 121-125 etc. 1% addition to max 37%

Example 1

You purchase a car with a list price of £60,000 and make a personal contribution of £5,000. The vehicle emits 78g/km of Co2.

The benefit in kind amount is calculated as follows:

£60,000 - £5,000 = £55,000
£55,000 x 13% = £7,150

Once you’ve got the benefit in kind amount, you’ll then need to work out the amount of tax to pay. As an employee, you’ll pay tax at 20% (40% if you’re lucky enough to be classed as a higher rate payer) and the company will pay Class 1A National Insurance of 13.8%.

  • You’ll pay: £7,150 x 20% = £1,430
  • Your company pays: £7,150 x 13.8% = £986.70

Are there any other charges?

If the car is a diesel, an extra 3% is added to the list price. The same maximum of 37% applies, so if the vehicle emits enough Co2 to be charged the highest penalty, this extra amount won’t apply.

Example 2

Using the information from Example 1, we’ll now assume that the car is a diesel. This means that the percentage of the list price you’ll pay is now 16% (13% for emissions + 3% diesel fee).

The benefit in kind amount would be calculated as follows:

£60,000 – £5,000 = £55,000

£55,000 x 16% = £8,800

Here’s the amount of tax to be charged:

  • You’ll pay: £8,800 x 20% = £1,760
  • Company pays: £8,800 x 13.8% = £1,214.40

Fuel charges

There’s an additional charge if your company pays for the fuel you use on non-business journeys. This is worked out by multiplying the percentage charged for Co2 emissions (for example, 13% in the case of the car in Example 1) by a standard amount of £22,100.

Example 3

Using the car from Example 1, the company pays for all the fuel that the car uses. This is worked out as follows: £22,100 x 13% = £2,873.

Here’s the amount of tax that will be charged for the fuel:

  • You’ll pay: £2,873 x 20% = £574.60
  • Company pays: £2,873 x 13.8% = £396.47

Here’s the total amount of tax that will be charged on the car and fuel combined:

  • You’ll pay £1,430 + £574.60 = £2,004.60
  • Company pays: £986.70 + £396.47 = £1,383.17

Are there any exceptions?

As with most rules, there are a few exceptions to be aware of. You won’t be charged a benefit in kind if:

  • An employee you provide a car for earns less than £8,500 a year (including the value of any benefits they receive). This doesn’t apply to directors, so you’ll still have to pay tax on your own vehicle
  • The vehicle is a pool car that’s used by more than one employee for work purposes only. This applies as long as the car isn’t kept at an individual’s home overnight

Need more help?

We hope the above guide has helped you get to grips with how benefits in kind are taxed. If you’d like a bit more detail, we’re here to help.

At ClearSky Contractor Accounting, we understand you probably won’t have much time in your busy WorkStyle to understand the benefits in kind rules inside out. That’s why our dedicated team is on hand to offer expert advice whenever you need it.

We’ll be with you all the way through your contracting career, from helping with company incorporation to providing IR35 assistance and beyond.

For more information, please call 0800 032 5326 or email enquiry@clearskyaccounting.co.uk.

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