Everything you need to know about company car tax, benefit in kind (BIK) and car allowances. The UK company car tax system can be very confusing, in this video I explain how company car tax works, show how to calculate the benefit in kind tax and also discuss the tax differences between a company car vs car allowance.
The Benefit in Kind is calculated by taking the vehicle’s P11D value (list price + optional extras, VAT & delivery) and multiplying it by the BIK % (which is based on CO2 emissions and fuel type).
At the moment the most tax-efficient company cars are electric vehicles (EV's) such as Tesla's as the benefit in kind on these is currently 0% for the tax year 2020/2021. This will increase by 1% a year for the next 2 years, however, the BIK on these vehicles will remain very low.
Employees may be offered a car allowance as an alternative to a company car. This is subject to Income Tax & National Insurance instead of BIK Tax.
If you own a LTD business and are considering a company car, I would highly recommend avoiding high emission cars. As both the owner and employee of the business you will face double taxation - BIK tax as an employee and Class 1A National Insurance as the employer.
Alternatively, many business owners choose to take advantage of (Mileage Allowance Payments) instead of a company car as this allows you to charge the business 45p per business mile for the first 10,000 miles and 25p per mile for anything above this. This payment is tax-free, isn't subject to benefit in kind and the business can offset it against corporation tax.
Also, as a business owner, it should be possible to get a car lease tax deduction on 100% of the vehicle rental providing the CO2 of the vehicle is below the LLR (Lease Rental Restriction) threshold. If it is above this then only 85% is available to offset against corporation tax. The LRR is currently 110g/km in 2020/21 but drops to 55g/km from April 2021.
If your business is VAT registered then it should be possible to reclaim 50% of the VAT (if the vehicle has any personal use, including commuting) or 100% if the vehicle is strictly business usage.
These are the links I mentioned in the video:
• P11D, CO2 and BIK Search: comcar.co.uk/companycar/tax/s...
• Company Car Benefit in Kind Thresholds: www.fleetnews.co.uk/fleet-faq...
Are you considering a company car such as a Tesla or other zero-emission EV - let me know in the comments!