Taxation on Company Cars
The company car continues to be an important part of the remuneration package for many employees, despite rises in the taxable benefit rates in recent years.
Company cars can impact the amount of tax paid by both the employer and the employee driving it. This depends on several factors, including the list price, the C02 emissions and the type of fuel used. That’s why it’s beneficial to explore all the options and choose a vehicle that benefits your staff and business and minimises the tax paid.
How does paying tax on a company car work?
When a car is provided for an employee by their employer that is available for personal use, the employee must pay some tax on the effective benefit that they receive for this.
To calculate the effective benefit the list price (plus VAT, any optional extras and delivery fees) of the car is compared with a % specified by HMRC each year based on the CO2 emissions of the car. This % is called the benefit in kind rate (BIK).
Employees are then subject to personal tax based on the result of this calculation. Employers will also pay Class 1A National Insurance on the same amount at 14.35%, reducing down to 13.8% in 2023.
The Employers NI is reported on form P11Db which is due for submission by the 5th of July post the tax year end (e.g., Tax year ended 5th April 2023 – BIK due for reporting by 5th July 2023).
The BIK value is multiplied by whatever income tax bracket the employee’s salary is in. This is either the basic rate of 20% tax on earnings over £12,570, the Higher Rate tax band of 40% for those earning more than £50,271 annually, or the 45% tax rate on earnings of £125,000 (from 6th April 2023) or more a year.
The factors that affect the amount of tax to be paid on a company car when calculating its BIK value include:
- The tax year
- The make and model of vehicle
- The list price, including accessories, and minus employee contribution towards the car
- The P11D value
- What type of fuel the car uses
- The car’s CO2 emissions
- How often the car is used
BIK rates vary for cars registered before and after April 2020, when the way of measuring emissions was updated.
Ways to minimise company car tax
With the price of petrol at an all-time high, it’s a good time to invest in an electric car.
An electric vehicle has a BIK rate of just 2% of the cars list price, which will remain fixed until 2025.
A hybrid vehicle (which runs on a combination of traditional fuel and an electric motor) is the next best thing to an electric vehicle in terms of reducing the company car tax bill. The BIK rate for hybrid vehicles depends on its C02 emissions and electric range. Those cars producing lower emissions, with a longer range qualify for a lower BIK rate.
Cars with high fuel use and high emissions are the most expensive company cars to tax. Some costing up to three times as much as a hybrid of the same value.
If the tax on a company car is too high to be of much overall financial benefit, employers may consider offering a cash alternative to cover the cost of a personal car, with a fuel allowance paid per mile travelled, or covering the fuel costs for business journeys instead.
Employees can then choose which car they run and could save them money versus using a company car if they drive an older or cheaper car. However, newer models are likely to tot up higher monthly finance payments than the amounts imposed by BIK tax.
Alternatives to the Company Car Model
Employers may also consider incorporating a Salary Sacrifice Car Scheme, whereby the employee takes a reduction in salary large enough to qualify for a lower income tax rate and pay less National Insurance in exchange for leasing a new vehicle from the company.
The employer is then responsible for paying for the essential accessories that come with car ownership, which helps reduce the cost burden on the employee.
However, since 2021 the employee has been required to pay income tax on the amount of salary sacrificed, unless the car provided is exempt.
Cars provided through a salary sacrifice arrangement are exempt if the car is:
- Privately owned by the director or employees
- Used for business purposes only, including a carpool
- Shared and usually kept on company premises, or
- Has been adapted for an employee with disabilities for journeys between the home and the workplace or workplace training.
Claiming travel expenses
Employees cannot claim mileage allowance from HMRC if they are driving a car owned by the company. Instead, company car drivers can claim fuel expenses for all business mileage where they paid for the fuel. Business mileage for personal journeys made in a company car cannot be claimed.
What is the tax on company provided fuel?
If the employer covers the cost for all fuel used by a company car, including personal journeys, this is also a benefit on which the employee pays tax.
The tax rate paid depends on the number of miles driven and how much CO2 the car emits and is calculated by HMRC using a fixed amount (£24,600 for 2021/22) which is then multiplied by the BIK tax band of the car.
Please note that fuel tax is applied regardless of whether you spend £1 of company money on personal car fuel or £1,000,000, the BIK charge is a fixed amount.
Therefore, unless the employee uses the car for private journeys covering tens of thousands of miles each year, it makes more economic sense to pay for the fuel themselves. However, if the employee drives a car with a low emission rate for many miles annually, it would be cost-effective to pay the tax on company-provided fuel.
Below we list the car fuel benefit charges for the current and previous tax years:
|Fixed figure (£)
Can I claim business mileage?
Business mileage covers journeys for business purposes such as client visits or travelling to a temporary workplace. Commuting from home to work and any other private journeys are not covered. Business mileage costs detract from the company and sole trader profits and therefore reduce the amount of tax owed at the end of the financial year, so it makes good sense to claim for this.
Both sole traders and limited companies can claim business mileage. Employees can claim from you as their employer. If you don’t pay employees business mileage, or you pay a lower amount than the HMRC’s approved mileage rates, those employees can claim the difference from HMRC at the end of the financial year.
Is it worth having a company car?
There are several benefits to having a company car. First is the obvious benefit of allowing employees to drive a safe, modern car. Many companies provide a list of pre-approved cars that employees can purchase at a special rate.
For the employee, having a company car brings the benefit of having insurance and maintenance covered by their employer while not having to be tied into a financial contract.
They also don’t have to deal with the car’s depreciating value, as they don’t own it, and it’s likely they get to drive a new model every few years.
Overall, it can be cheaper to pay the tax on a company car than to lease the same car from a private source. The low rates for electric company car tax mean it’s almost always preferable to acquire an EV or PHEV through a company car scheme than to buy one privately.
Can Sole Traders have company cars?
Sole traders, by definition, have no company and therefore cannot have a company car, they can still claim mileage and other expenses for a car used for and business purposes. Sole traders can either claim full running costs of the vehicle, including insurance, servicing, repairs, and fuel minus an appropriate amount taken off for personal journeys, or they can claim full business mileage rates for business journeys as set by HMRC. For example, for 2022/23, you can claim fuel at a rate of 45p per mile up to 10,000 miles for a van or car and 25p per mile after that, and 24p per mile when driving a motorbike.
How we can help
LKA Chartered Accountants is a national award winning team based in Thames Ditton, Surrey.
For more detailed advice on the taxation of company cars please call 020 3915 8585 or email firstname.lastname@example.org.
Cars for Employees Factsheet