Are company cars tax-efficient in 2022?

May 2, 2023 | Tax

Are company cars tax-efficient in 2022?

Company cars have historically been a popular benefit, but they’re not as tax efficient as they used to be – with one big exception. 

Choosing a company car

A company car is a great perk to any job, but we’d advise choosing your vehicle carefully. Tax on company vehicles comes out of the driver’s payslip. If you’re using it privately, which includes commuting, then you’ll be paying tax on it.    Your company car tax contributions are based on the cost of the car, how much you earn, and the amount of CO2 the car produces. If you’re a high earner with an expensive car with high CO2 emissions, you will end up paying more. This also applies to diesel cars, which can pay an additional 4% surcharge on top of petrol costs.   However, there is a solution, which can help the environment and protect your tax bill. The Government is keen to promote the use of electric cars. These cars are designed to have low emissions, lessening their environmental impact.    If a company car has zero CO2 emissions then the tax on it is low, to encourage drivers to opt for them as their vehicle of choice. This is the case even if it was expensive or the driver is a high earner. 

How are company cars taxed?

Company cars are taxed as a benefit in kind, which means it is taxed separately from (although at the same time as) your salary.    HMRC takes the cost of the P11D value of the vehicle, which is the sum of its price, cost of delivery, VAT and some extras, and multiplies it with a benefit-in-kind rate.    These rates are now all based on the CO2 emissions of the vehicle. The Government is keen to get people using greener cars, and as a result, the benefit in kind rating for electric cars is currently just 2%. This is set to be the case until at least April 2024.    If you have an electric company car you will save yourself thousands of pounds annually in tax – as well as doing your bit for the planet.    The same applies to the fuel your company car uses. You can expect to pay tax on fuel if it’s provided by your company. Once again, the exception is electric cars – the electricity used to power them is not taxed, whether at home or the office. 

Other tips for tax-efficient company cars

While we would recommend an electric vehicle as the best way of making a company car tax efficient, there are other methods you can reduce the tax burden for a company car.    Paying something towards the cost of the vehicle can put you in a lower tax bracket, although it is important to check if this is a sufficient amount to reduce your expenditure.    You can also pay less tax if you share the company car with others. Overall, though, going electric is the way forward, both for the planet and for your wallet.    Need more advice? We’re here to help. Contact us, or find out more about our tax and business services.

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