A company car can be a great perk of a job and a sought-after benefit, particularly if you do a lot of travelling with work. However, deciding whether to opt for a company car is not as straightforward as it may seem.
There are various factors to consider, especially when it comes to tax and accountancy implications. In this blog post, we will steer you through the crucial aspects that you need to take into account when deciding whether a company car is the right choice for you.
What is a company car?
A company car is a vehicle provided by an employer for the business and, sometimes, personal use of an employee or company director. It’s an attractive employee benefit that can be used to attract and retain talented staff. The employer either owns or leases the car, and the employee can use it for both business and personal purposes, following the company’s policies and terms. The level of this benefit may vary based on the employee’s position, seniority, and company policies.
Employment status and tax implications
The first thing to consider is your employment status. Whether you are an employee, a sole trader or a director of a limited company will significantly influence the tax treatment of the company car benefit.
If you are an employee, the company car benefit is treated as a taxable benefit-in-kind (BIK). The value of the benefit is calculated based on the car’s list price, its CO2 emissions, and the fuel type. Your employer will report this benefit on a P11D form, and it will be subject to income tax and National Insurance contributions (NICs).
If you are a sole trader, you may use a car for business purposes and claim a portion of the expenses against your taxable profits. However, the tax treatment will differ based on whether you own the car personally or whether it is owned by the business.
If you own the car personally
You can claim expenses for business mileage based on HM Revenue & Customs’ approved rates. For the 2023-24 tax year, the rate for cars is 45p per mile for the first 10,000 business miles and 25p per mile thereafter. Additionally, you can claim capital allowances (tax relief for businesses) on the cost of the car if it is used solely for business purposes.
If the car is owned by the business
The expenses for business mileage can still be claimed at the approved rates, and the business can claim capital allowances on the car’s cost, considering any private use adjustments.
Directors of limited companies
Similar to employees, directors of limited companies will be subject to the company car benefit rules. The company will report the benefit on the director’s P11D form, and the director will be taxed accordingly.
The tax payable on the company car benefit will vary depending on the car’s CO2 emissions and the fuel type. For example, for the tax year 2023-24, the BIK rates for cars with emissions up to 50g/km range from 2% to 14%. As the CO2 emissions increase, so do the BIK rates, with cars emitting over 185g/km being subject to a 37% BIK rate.
Buying vs. leasing a company car
Deciding whether to buy or lease the company car also has implications for tax and accountancy purposes.
If you buy the car outright, you can claim capital allowances on the cost of the car. However, the amount of capital allowances you can claim depends on the car’s CO2 emissions. Low-emission cars typically qualify for more favourable allowances.
Capital allowances fall into two categories: the main rate pool and the special rate pool. The main rate pool currently allows a writing-down allowance of 18% per year on a reducing balance basis. The special rate pool allows a 6% writing-down allowance on a reducing balance basis. Cars with CO2 emissions up to 50g/km fall into the main rate pool, whereas cars with higher emissions go into the special rate pool.
If the car is purchased outright and used solely for business purposes, depending on the type of vehicle, you may be able to claim first year allowances or writing down allowances which will in turn reduce your taxable profits in the year of purchase.
When you lease a company car, the lease payments are generally considered as operating expenses, which means you can deduct them from your taxable profits. Additionally, VAT on lease payments is usually recoverable, making leasing an attractive option for many businesses.
Under the HMRC regulations, in certain instances when leasing or hiring a car you may not be able to claim the entire amount of hire charges or rental payments. For instance, if you leased a car on or after 6th April 2020 with CO2 emissions exceeding 110g/km, you must disallow 15% of the hire charge or rental cost.
Tax for different types of company cars/vehicles
The type of vehicle you choose also affects the tax treatment.
Cars are subject to the standard company car benefit rules and are categorised based on their CO2 emissions. The higher the emissions, the higher the taxable benefit.
The BIK rates for cars with emissions up to 50g/km range from 2% to 14%, while cars with emissions above 170g/km are subject to a 37% BIK rate. These rates will remain frozen until the 2024 to 2025 tax year.
However, it’s essential to note that fully electric cars with zero CO2 emissions currently attract the lowest BIK rates, making them a cost-effective option for both employees and directors.
Vans, on the other hand, have different tax treatment. They are generally considered more tax-efficient, with lower benefit-in-kind rates and favourable capital allowance rules.
For vans, the BIK rate is generally fixed regardless of CO2 emissions. For the tax year 2023-24, the flat-rate BIK for vans is set at £3,960. If the van is unavailable for personal use, there will be no tax on the benefit.
It’s important to determine whether a vehicle qualifies as a van for tax purposes, as some vehicles that may appear to be vans could be categorised as cars. HM Revenue & Customs provides guidelines on defining a van for tax purposes.
Specific tax rules for electric vehicles
The UK government encourages the adoption of electric vehicles (EVs) by offering various incentives and favourable tax treatments.
Zero emission vehicles
Fully electric vehicles with zero CO2 emissions currently attract the lowest BIK rates, making them a cost-effective option for employees and directors.
For the tax year 2023-24, the BIK rate for fully electric cars is 2%, depending on the car’s value and the number of electric miles it can travel. This is a significant advantage compared to conventionally fueled cars, which have higher BIK rates.
The BIK rate of 2% is applicable to hybrid vehicles with CO2 emissions up to 50g/km and a full electric range exceeding 130 miles. However, as the electric range decreases, the BIK rate gradually increases. For vehicles with higher emissions, the BIK rate starts to rise incrementally and can reach up to 37%.
Pure electric company vans do not have a benefit charge.
Enhanced capital allowances
Businesses can claim 100% first-year allowances on the purchase of certain zero-emission vehicles, providing significant tax benefits.
For the tax year 2023-24, the enhanced capital allowance applies to cars with CO2 emissions of up to 50g/km and an electric chargeable range of 130 miles or more. These cars can be fully deducted from taxable profits in the year of purchase, promoting the use of environmentally friendly vehicles.
Other tax benefits for electric vehicles
– Congestion charge and zero-emission zone exemptions in cities.
– Cars with 0g/km CO2 emissions qualify for 100% first-year capital allowances.
– Employers providing EV charging points can be exempt from BIK taxation.
– EVs enjoy reduced or exempted road tax based on emissions.
You can read more about the savings you can make by choosing an electric vehicle here.
Company car allowance
Instead of opting for a company car, some employers offer a company car allowance. In this case, you receive a fixed amount to put towards your own car expenses. The advantage of a car allowance is that you have more flexibility in choosing a vehicle that suits your needs, and you can potentially save on tax and National Insurance contributions.
When receiving a company car allowance, it is essential to understand that the allowance will be taxed as part of your regular income, and National Insurance contributions will apply. Depending on your personal circumstances and the amount of the allowance, it might be more cost-effective compared to having a company car. However, the decision should be based on individual factors, such as your expected business mileage and personal preferences.
Deciding whether to get a company car involves careful consideration of your employment status, the type of vehicle, and whether you choose to buy or lease. Additionally, with the increasing emphasis on eco-friendly options, electric vehicles offer compelling tax benefits.
How we can help
Navigating company car tax can drive you around the bend, but you don’t have to navigate it alone! At CRM Accountants, we offer expert advice and assistance with company car tax. Our dedicated team is here to help you understand the intricacies of the tax rules and ensure you claim the maximum tax relief you’re entitled to. Whether you need guidance on tax implications, capital allowances, or the benefits of electric vehicles, we have the knowledge and expertise to support you.
If you need assistance with company car tax or any other accounting services, you can count on CRM Accountants. Contact us today at 01865 379272 or fill out our contact form to schedule a consultation.