A full and extensive guide to company car tax

Hybrid and plug-in hybrid cars

Hybrid and plug-in hybrid (PHEV) cars enjoy the next lowest rates. Their emissions, however, are linked to them being able to travel on battery power alone, their rates are calculated using a combination of CO₂ emissions and their official electric range only range.

There are five rate bands for hybrids.

Cleaner diesels

When the current system was introduced, it included a discount of 3% for diesel powered cars compliant with the Euro IV emissions standards to encourage earlier take-up of ‘cleaner diesels’ and effectively cancelling the 3% surcharge on all diesel company cars.

The nature of the diesel supplement was reformed from 6 April 2018.

From that date, the supplement was increased to 4% and it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard.

The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.

From January 2021 it became mandatory that all diesel cars were tested under RDE2 meaning that the 4% surcharge should not apply on those cars.

Diesel-electric hybrids are classed as alternatively fuelled vehicles so avoid a surcharge even if they are not compliant with RDE2.

When the rates for cars registered before and after 6 April 2020 are merged during the 2023/24 tax year, drivers of older diesel-powered cars will still incur a 2% supplement on their company cars, unless they meet the latest RDE2 testing criteria, which all new cars must do.

CO₂ emission information

For all cars first registered from at least November 2000, the definitive CO₂ emissions figure for tax purposes will be recorded on the Vehicle Registration Document (V5). You should be able to obtain details of the emissions at the Vehicle Certification Agency.

Older cars

Cars first registered before January 1998, for which there are no reliable CO₂ emissions data, are taxed according to their engine size, as follows:

and/or accessories, when the car is first made available, will continue to reduce its price for tax purposes.

By contrast it is “all or nothing” for the fuel scale charge, which remains at the full value unless the employee pays for all private fuel!

HM Revenue & Customs has published baseline rates which will be accepted either for employers re-imbursing employees for the cost of fuel for business mileage, or for employees re-imbursing employers for the cost of fuel for private mileage.

Alternative rates may be negotiated, for example when it is necessary for the performance of his or her duties that an employee uses a four-wheel drive vehicle, a higher rate per mile might be agreed due to the typically higher fuel consumption of such vehicles.

Current mileage rates – 1 September 2022

These mileage rates came into force officially on 1 September 2022.

The advisory electricity rate for fully electric cars is 5 pence per mile. Hybrid cars are treated as either petrol or diesel cars for advisory fuel rates.

HM Revenue & Customs has announced that rates will now be reviewed quarterly and any changes will take effect on 1 March, 1 June, 1 September and 1 December.  You can obtain the latest advisory rate at HMRC.

Reductions for unavailability of car

When the car is unavailable for any part of the year, the charge is reduced in proportion to the number of days of unavailability.

A car is treated as being ‘unavailable’ on any day if the day falls:-

• Before the first day on which the car is available to the employee;
•  After the last day on which the car is available to the employee;
• Within a period of 30 or more consecutive days throughout which the car is not available to the employee.

If the car is unavailable for a period of less than 30 days, then there is no reduction. If during the period of unavailability of the original car, the employee is provided with a replacement car, it’s not also charged as a benefit if it’s not:

• materially better than the normal car;
• given as part of an arrangement whose purpose was to provide the employee with a materially better car then the normal car.

Shared cars

In order for a company car to be treated as shared, the following criteria needs to apply:

• the car is available to more than one employee concurrently; and
• the car is made available by the same employer; and
• the car is available concurrently for each employee’s private use; and
• 2 or more of those employees are chargeable to tax for that year.

A form P11D would need to be submitted for each employee who is sharing the car if the above criteria are met. You would calculate the benefit by:-

• Calculating the cash equivalent of the benefit of the car as though each employee had exclusive use;
• Reduce the benefit on a just and reasonable basis by calculating the benefit on a pro rata basis depending on which employee used the car the most.

2022/23 taxable benefits table – Petrol powered and hybrid cars

These rates will remain in force until 2024/25.

For the benefit to be attractive, the employee must pay less in extra tax than it would cost him to run his own car out of his taxed income. These are examples of the 2022/23 tax costs to an employee of a company car:

Basic rate liability example

*- assumes that 4% supplement is in use

Higher rate liability example

*- assumes that 4% supplement is in use

Additional rate liability example

*- assumes that 4% supplement is in use

Tax free benefits

Car Parking

The provision of a car parking space at or near the employee’s place of work whether the employer provides for or reimburses the employee is not an assessable benefit.

Pool Cars

There is no tax for using a pool car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others.
Please note: A pool car must not normally be kept overnight at or near an employee’s home.

“Lower Paid” Employees

The provision of a car for an employee (NOT a director) who is paid at a rate below £8,500 per year (including the value of benefits) does NOT attract any charge to income tax. Nor is there any charge on fuel for private use provided to such employees.

Consideration for Sole Traders

If your spouse is employed in your business (but not as a partner), it can be very tax efficient to provide them with a car, as long as they earn well below £8,500. The use of the car can be tax-free in their hands, and the business will get full tax relief on all the expenses connected with the car, provided you can demonstrate the car is necessary for business purposes.

Business use of an employee’s own car

It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own cars.

A statutory system of tax and national insurance free mileage rates applies for business journeys in employees’ own vehicles, as follows:

It is no longer possible to make a claim for tax relief based on actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.

Unless the employee is reimbursed at a rate higher than the statutory mileage rate, the payments do not need to be reported on a P11D.

Passenger payments

When an employee travelling on business carries fellow employees as passengers he may be reimbursed a further 5p per passenger tax free provided the journey is a business journey in respect of the passengers. No claim can be made if the employer does not make passenger payments.

Company vans

The taxable benefit for the unrestricted use of company vans is £3,600 (with no reduction for older vans) plus a further £688 of taxable benefit if fuel is provided by the employer for private travel.

The tax payable on the use of a company van ranges from £858 up to £2,058 per annum and the employer’s Class1A NIC payable ranges from £541.80 to £645.34 per annum.

Tax saving check list

• Keep adequate records of business mileage.
• Always check your tax code to see that the correct benefit is being applied.
• Sole traders and partners should consider the potential tax advantages of providing their spouse with a company car.
• If you have low private mileage, you may be better off if you pay for all your own private fuel.
• If you have high business mileage, it may be better to use your own car and claim “mileage” from your employer.
• Encourage your employer to apply for a P11D dispensation.
• If you are on the borderline of “lower paid”, think about setting up a contribution for the use of the car, to keep on the right side of £8,500.
• Tax – free parking is a must

Local accountants and tax advisers, Trueman Brown, deliver necessary services for small business. Call us if you require assistance.