It is classed by the Inland Revenue as a part of your salary package that you take in a form other than cash and is taxable like other pay at your highest rate of income tax. There are special rules for calculating its taxable value.
Under the old system the tax you paid would have depended on the size of the engine and the price your employer paid for it. On 5 April 1994, the Revenue switched to a system that depends on the list price, its age and how many miles you drive for business use. The rules apply both to company cars after that date and to cars still in use.
To calculate the tax you will have to pay you must start with your car's list price, including delivery charges, the price of any optional extras and VAT. The maximum possible price is taken to be pounds 80,000.
Say for the sake of argument that your car's total price comes to pounds 10,000. You will have to pay tax on 35 per cent of that figure a year, a sum that the Revenue refers to as your car benefit charge (CBC). In this case, your CBC would be pounds 3,500.
Tax is charged at your marginal rate of income tax: 25 per cent basic rate or 40 per cent for higher-rate taxpayers.
There are various ways this bill can be reduced. If you make a contribution towards the cost of the car yourself, this reduces the list price pound for pound, so reducing the value of the car on which the CBC is calculated.
Your CBC will also depend on how many business miles you do. If you do between 2,500 and 17,999 miles a year on business then you can cut your CBC by one-third. If you do 18,000 business miles a year or more then you can lop two-thirds off your CBC. Where the car is available to you for only part of the year, these mileage limits are reduced in proportion. Business travel includes any journey that you must make in order to carry out your work but does not include your journeys between work and home. If your car is worth pounds 20,000 then jumping from one mileage band to the next could save you as much as pounds 934 a year in tax.
If you change your company car half-way through the tax year you should be particularly careful. Leslie Ferrar, a tax partner at KPMG, says: "You've got to make sure you've done the pro rata amount of miles in each car. Typically people tend to back-end-load their mileage so you'll find that the first nine months they do nothing, then in the last three months they do their 2,500 business miles. But if you do that and you change your car six months into the year you may find for the first half of the year you've got no business mileage at all, in which case you'll pay the full tax charge on those six months."
If your car is four years old or more at the end of the tax year you can take another third off the CBC as it stands after the deduction for business mileage.
Should your car be due for a change around the end of the tax year it may well be worthwhile making sure you take delivery before 6 April, as that will bring forward the date at which you can make the four-years- old deduction by a full 12 months.
Some employees pay their employer a charge for private use of the car, and these payments can be deducted from the CBC before calculating the tax due. But you should make sure that the fact you are making these payments is clearly set out in the agreement with your employer. Mr Ferrar says: "There's just been a special Revenue commissioners' decision where someone was paying some money for the private use of a company car. They didn't have that clause in and were unable to deduct it."
If your employer also provides you with free fuel for private motoring as part of your company car deal, then you will also have to pay tax on that. The taxable value of this benefit will depend on the size of your car's engine and whether it runs on petrol or diesel fuel. As with the CBC calculations you pay tax on these amounts at your marginal rate of income tax.
These rules have cut the benefits of company car ownership. More and more people will find they may be better off running their own car and taking a salary increase instead of accepting a company car.
This applies particularly if your business mileage is low. Some employers will help employees running their own cars by arranging company-wide insurance schemes or other benefits to reduce the hassle of owning your own car.
David Oliver, a tax partner at Arthur Andersen, says: "The basic rule is don't regard a company car as something sacred. Think about what your company car is really doing for you, how much it is costing in tax terms, and whether there are better and more efficient ways of getting what you really want out of a car."
COUNTING THE COSTS
Car registered 3 April, 1990 with air-conditioning and alloy wheels. Annual business mileage of 3,000 miles.
List price including VAT: pounds 12,650
Delivery and number plates: pounds 363
Air conditioning: pounds 755
Alloy wheels: pounds 305
Price of car for tax purposes: pounds 14,073
CBC (35 per cent): pounds 4,926
Mileage allowance (one third): pounds 1,642
Leaving pounds 3,284
4yr old allowance (one third): pounds 1,095
Tax payable on: pounds 2,189
Tax at 40 per cent: pounds 876
Tax at 25 per cent: pounds 547
Source: Inland Revenue