Does having a company car change my tax code?

Full answer

When your employer provides a company car that you (or your family) can use privately, not just for business journeys, HMRC treats the value of that private use as a taxable benefit in kind, calculated as a percentage of the car's list price based on its CO2 emissions (with electric and low-emission cars taxed much more favourably than higher-emission petrol or diesel models). Rather than sending you a separate bill for the Income Tax due on this benefit, HMRC usually collects it by adjusting your tax code, effectively reducing your tax-free Personal Allowance by the taxable value of the car benefit, so that more of your regular salary is taxed instead. For example, if your car's taxable benefit value is £5,000 a year, HMRC would typically reduce your allowances by £5,000, changing your code from the standard 1257L to something like 757L (representing an effective Personal Allowance of £7,570), meaning an extra £5,000 of your salary is now taxed at your marginal rate through the year, rather than as a lump sum later. This adjustment is usually based on an estimate provided by your employer at the start of the tax year via a form P46(Car) when the car is first provided, or through payrolled benefits if your employer has chosen to tax the benefit directly through payroll instead of via a code adjustment -- in which case your tax code stays closer to standard, but your payslip shows the benefit added to your taxable pay each period. If you give up a company car partway through the year, tell HMRC promptly, since your code will otherwise continue assuming the benefit is ongoing, causing you to overpay tax until it is corrected.

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