A company car is one of the most popular benefits an employer can provide an employee. Despite its popularity the tax rules surrounding this benefit are far from simple. There are a number of considerations to be made by both employees and employers. In this guide we try to cover all of the basic information needed before deciding to take or provide a company car.
What is a company car?
A company car is a car given to an employee by an employer to use for both business and personal driving. Traditionally companies would purchase a fleet of vehicles to provide to their employees. These days employees have a choice of cars from a list pre-approved by their employer.
Benefit in Kind (BiK)
A company car is taxed on both employees and employers as a benefit in kind. This means that a cash equivalent value is placed on the vehicle based on it’s list price, CO2 emissions and any zero emission range (electric and hybrid cars).
Employees pay income tax at their relevant rate on the cash equivalent value and employers pay national insurance contributions, currently at 15.05%.
The list price of a car is the manufacturers recommended selling price of the vehicle. The benefit in kind value is based on this rather than the purchase price of the vehicle.
Depending on the CO2 emissions and electric range the car will fall in one of a number of bands, this band determines the percentage of the list price that forms the cash equivalent value on which tax is payable. The applicable bands for the current year can be found on HMRCs website here. A company car with a list price of £40,000 with CO2 emissions of 40g/km and an electric range of 50 miles.
List Price x Relevant % = Cash equivalent value
Income Tax payable by the employee – If you’re a basic rate taxpayer then you would pay 20% of this in income tax (£640). If you’re a higher rate taxpayer then you would pay 40% of this in income tax (£1,280).
NICs payable by the employer – 15.05% of the cash equivalent value (£481.60). These employer NICs are a tax deductible expense for the employer.
Other factors also affect the calculation of the cash equivalent value. For example if any accessories or options are specified at the time of purchase this will increase the list price of the car.
The taxable amount is also adjusted for any time that the vehicle was not available for the employees use. For example if the car was taken away for repairs.
Fuel benefit charge
If the employer pays for the fuel used by an employee in their company car for both business and private use then an additional benefit arises which is chargeable to income tax for the employee and on which NICs will be due by the employer.
The rate of which is fixed each year by HMRC. For the current tax year (2022/23) this figure is £25,300. To calculate the cash equivalent value this amount must by multiplied by the relevant percentage based on the CO2 emissions as above.
So in the previous example if fuel was also provided by the employer then the cash equivalent value of the fuel benefit would be £2,024. This would be the amount taxed.
Tax reliefs for employers
As with any business vehicle tax reliefs are available. All running expenses such as insurance, road tax and maintenance costs can be claimed as a tax deductible expense when computing taxable profits.
The way the cost of the vehicle itself will be claimed for tax purposes depends on whether it is purchased or leased. Most company cars are leased rather than purchased.
Leasing
If a vehicle is leased by the business then the full lease rental can be claimed as an expense each month. The only exception to this rule is in the case that CO2 emissions of the car exceed 50g/km. If this is the case then the tax deductible cost is restricted by 15% with only 85% of the lease cost being allowable as a tax deduction.
If your business if registered for VAT then you can claim 50% of the VAT charged on lease rental payments.
Purchasing
If a vehicle is purchased by the business (even under a Hire Purchase agreement) then the claim against taxable profits will be made under capital allowances. The amount you can claim depends on the CO2 emissions of the car:
