Company Car Tax Explained

Company cars are a nice little extra that businesses can offer to their employees as a perk, and what’s even better, they come with tax advantages as well. In this article, we’re going to explore the lay of the land surrounding company cars, from the benefits, the tax details and everything in-between.

If you’ve landed on this article and you don’t know what a company car is, then maybe take a few steps backward. But as you’re here now, let’s go over the basics anyway. A company car is a vehicle provided to its employees as a perk on top of their salary. The company has the option to lease or own the vehicles outright, and it’s often given to employees in roles that involve lots of traveling.

Along with being a perk for employees, they can also be used for logistical needs like transporting goods, or for business travel – like attending client meetings or going on-site visits.

Leased vs Owned?

Choosing between whether to lease or buy company cars outright really depends on the use of your vehicles.

Leased Vehicles: they offer less upfront costs and often the maintenance and MOTs etc are included as part of the price. Over time, they will end up costing more than buying the car due to the premium you pay each month, however with leased cars there’s often the option to update models. So although you may pay more, you pay for the convenience of new models, maintenance and repair work as part of the package.

Owned Vehicles: on the flip side, owning a vehicle requires a much greater upfront cost, but once it’s paid, it’s paid. This can be beneficial for some company’s cashflow, and it allows you to physically own an asset rather than renting one. The negative side is that you’ll also have to handle all the maintenance required, and your vehicle will eventually depreciate.

Benefits of Company Cars for Employers

Staff retention

The obvious benefit of company cars for employers is that it acts as an attractive perk to employees, which could help with staff retention and attracting new talent when hiring.

Employees also benefit from not having to worrying about vehicle expenses and maintenance, which could be big for improving staff morale and productivity.

Branding and Marketing

Having a fleet of branded vehicles that you give to your employees also acts as a good marketing tool for when those employees are out on the road or meeting clients.

Benefits of Company Cars for Employees

Convenience and Cost Savings

The big benefit of company cars for employees is that it can save them a huge amount of personal expense. You are essentially giving your employees a car to use for free, meaning they’ll save on petrol, insurance and maintenance, which in today’s economic climate could be a significant saving. They also won’t have to worry about insuring or maintaining, as this will often be taken care of by the employer or the company you use to rent the vehicles.

Access to Newer, More Reliable Vehicles

As mentioned earlier, another potential benefit is that employees will have access to the latest models of vehicle that they otherwise may not be able to afford. Of course, you are still technically just renting the car, but if it costs your employees nothing then it’s a win-win.

Potential Personal Use Advantages

Although they’re often used for strictly business purposes, most employers will still be flexible about the use of the vehicles. So employees will sometimes be able to use the cars in their personal lives. The reason why there is a caveat on this, is that some employers will have rules around the amount of mileage you’re allowed to do outside of work. This is because if every employee had complete free reign, and could use the car for long journeys whenever they liked, it would cost more in maintenance and could increase the likelihood of insurance claims being made from accidents.

Taxation and Legal Considerations

Let’s face it, taxes can be complicated, especially when it comes to company cars. But understanding how company car tax works in the UK can save you and your employees a lot of money and hassle. So, let’s break it down in simple terms.

Find out about the latest dividend tax rates in the UK. 

Overview of Company Car Tax in the UK

First things first, what is company car tax? Essentially, when you provide a company car to your employees, it’s considered a benefit-in-kind (BIK). This means it’s seen as a perk or benefit, and just like other perks, it’s subject to income tax. The amount of tax your employees will need to pay depends on two main factors: the car’s value and its CO2 emissions. But don’t worry, we’ll go through these in more detail.

How Benefit-in-Kind (BIK) Tax Works

So, how exactly is this BIK tax calculated? It’s pretty straightforward once you get the hang of it. The tax is based on the car’s list price (also known as the P11D value) and its CO2 emissions. Here’s a simple way to think about it:

1. Car’s List Price (P11D Value): This is the car’s official price before any discounts or special offers. It includes the cost of delivery and any extras you’ve added, like fancy wheels or a high-tech sound system.
2. CO2 Emissions: This is where it gets a bit greener. The lower the car’s emissions, the lower the tax rate. The government wants to encourage eco-friendly choices, so cars that emit less CO2 fall into lower tax bands. This means if you opt for a hybrid or an electric car, your employees could end up paying significantly less in taxes.

Check out all there is to know in our guide to P11Ds here.

Impact of CO2 Emissions on Tax Rates

Let’s dive a bit deeper into those emissions. CO2 emissions directly affect the tax bands. Each car falls into a specific tax band based on its emissions, and this determines the percentage of the car’s list price that is taxable. For example, a car with very low emissions might be taxed at 16% of its list price, while a gas-guzzler could be taxed at 37%. This means choosing greener cars can result in big savings for your employees.

Employer National Insurance Contributions

But it’s not just the employees who need to think about taxes. As an employer, you’ll also have to pay National Insurance Contributions (NIC) on the BIK provided. This is based on the value of the BIK – essentially, what it’s worth as a benefit to the employee. The rate is generally 13.8% of the BIK value. So, the lower the BIK value (again, think low-emission vehicles), the less you’ll pay in NIC.

Tax Exemptions and Reductions

Now, here’s where it gets interesting – and potentially very cost-effective. The UK government offers several tax breaks and incentives for businesses that go green. Electric and low-emission vehicles not only fall into lower BIK tax rates, but they also come with additional perks. For instance:

• Reduced BIK Rates: Electric vehicles (EVs) have very low BIK rates. For example, in the 2023/24 tax year, EVs might have a BIK rate as low as 2%.
• Grants and Incentives: The government offers grants like the Plug-in Car Grant, which can knock thousands off the price of a new electric vehicle. There are also tax breaks on the installation of EV charging points at your business premises.
• No Road Tax: Many electric vehicles are exempt from road tax, saving even more money.

Find out about another way of rewarding staff in a tax-efficient way with our introduction to EMI Schemes article.

All things considered

Understanding the intricacies of company car tax can seem daunting at first, but it’s well worth getting to grips with. By choosing the right vehicles, you can significantly reduce the tax burden on both your business and your employees. Plus, you’ll be doing your bit for the environment, which is a great bonus. Whether you opt for leasing or buying, going green with your company car fleet can lead to substantial savings and help you stay ahead in the eco-friendly business game.