How the benefit charges are calculated
The car benefit charge for a company car is based on the list price of the car including any accessories, its carbon dioxide emissions (calculated using a system known as the appropriate percentage), the type of fuel it uses, whether you pay anything towards the car, and whether it was available for the whole tax year.
This tax year 2016/17, the appropriate percentage is 21% of the list price for cars with CO2 emissions of 120g/km or less. The charge increases by 1% for each additional full 5g/km up to a maximum charge of 37% for emissions of 220g/km or more*.
If the car uses diesel there’s a 3% supplement on top. But the maximum charge overall is still 37%.
An example
So in practice this is how it works:
Let’s say the list price for a company car – including accessories – is £21,000, the car has CO2 emissions of 185g/km and it uses petrol.
The appropriate percentage will increase by 13% to 34% because it is 65g/km above the 120g/km threshold. Therefore, the taxable benefit in this example is £7,140 (£21,000 x 34%).
The actual tax deduction is paid at your highest rate of tax. This means if you’re a basic rate taxpayer the company car will cost you £1,428 (£7,140 x 20%) – or £119 a month – this tax year. Meanwhile, if you’re a higher rate taxpayer, the car will set you back £2,856 or £238 per month at 40% tax.
If the car uses diesel, the taxable benefit will rise to £7,770. The benefits percentage steps up from 34% to 37% with the addition of a 3% diesel supplement. This time a basic rate taxpayer will pay £1,554 (£7,770 x 20%) – or £129.50 per month. Higher rate taxpayers will pay £3,108 (£7,770 x 40%) – or £259 per month.
Bear in mind this possible scenario. You're a basic rate taxpayer but the cash equivalent of the car pushes you into the higher rate tax band. If that happens, part of the calculation will be taxed at 20% and the remainder at 40%.
Contributions and fuel
If you make a capital contribution to the cost of the car – up to a maximum of £5,000 – your tax bill will fall.
Don’t forget, if your employer pays the cost of fuel for private use, it will be treated as a taxable benefit too.
Try this HMRC calculator to work out the tax calculation for your own company car.
*Taxable benefit starts at 7% of the list price for cars with 0g/km to 50g/km emissions, 11% for emissions from 51g/km to 75g/km and then an 15% at 76g/km to 94g/km. Then there’s an additional 1% per 5g/km from 95g/km up.