Company cars remain a popular employee benefit. Some company car drivers also receive free fuel for private use.
Both employers and employees need to consider the tax implications of company cars before making decisions. Employers will pay Class 1A National Insurance on the benefit. Employees pay income tax on the benefit but do not pay national insurance. A car's CO2 emission levels can have a significant impact, as can the decision whether to buy, lease or use your own car.
1. Employee car tax
Company cars are taxed as a benefit in kind for most employees and income tax is payable
- There are some special cases.
- Pool cars used by more than one employee for their work are not taxed. A pool car must not normally be kept overnight at an employee's home.
- Employees pay tax at their top rate
The income tax charge is based on an assumed benefit
- This is calculated as a percentage of the car's list price. The percentage depends on the car's CO2 emissions. The higher the emissions, the higher the assumed benefit is.
- For 2023/24, the rates range from 2% (for cars with zero emissions such as electric cars) up to 37%, with more polluting diesel cars paying an extra 4% up to a maximum of 37%. The rates for different emissions depend on whether the car was registered before or after 6 April 2020 (when emissions testing rules changed).
- For low emission hybrid cars (below 50gm of CO2 per kilometre), the rate depends on the electric range. 2022/23 rates range from 2% (for an electric range over 130 miles) to 14% (range below 30 miles).
- The tax cost to the employee depends on their tax rate. For example, for a car with a list price of £20,000 and a rate of 30% (based on emissions), the benefit in kind would be £6,000 (£20,000 @ 30%). The income tax charge would be £1,200 for a basic rate taxpayer (£6,000 @ 20%) or £2,400 for a higher rate taxpayer (£6,000 @ 40%).
- It is currently the government’s intention to continue that trend to increase the rates applied to each CO2 band from 2025/26 onwards to pursuade businesses to buy more fuel-efficient cars.
- Higher business mileage now has no effect on the tax charge. Nor has the age of the car, except that a special scale charge applies to cars registered before 1998.
The list price is based on the price published by the manufacturer, importer or distributor
- Delivery charges, tax and VAT are included, but not vehicle excise duty.
- The list price of any accessories (plus fitting and VAT) is also included.
- Accessories worth up to £100, fitted after the car has been delivered to the employee, are excluded. So are mobile phones, equipment necessary to a disabled driver, and equipment necessary to the driver to perform their duties.
- The cost of enabling the car to run on compressed natural gas (CNG) or liquid petroleum gas (LPG) is also excluded.
Employees provided with a van pay tax if there is any significant private use
- Employees are taxed on a benefit of £3,960 for 2023/24 for all levels of non-zero CO2 emissions.
- For zero emissions vans, the charge is zero for 2023/24.
- If the only private use is travelling between home and work, employees pay nothing.
- If several employees share the same van, the value of the benefit for each employee is reduced on a just and reasonable basis.
2. Tax on fuel
If any free or subsidised fuel is provided for private use in a company car or van, the employee pays income tax on this benefit. The value of the benefit depends on the fuel efficiency of the engine, not on how much fuel is provided.
The percentage charge for each car is normally the same as that car's charge for car benefit
- Cars with higher CO2 emissions have a higher percentage charge.
- Discounts and exemptions apply for electric cars and vans.
The percentage charge is applied to an annual figure to determine the taxable benefit
- This fixed figure or "fuel charge multiplier" is the same for all cars and is not linked to list price.
- The benefit charge multiplier is £27,800 in 2023/24.
- So for a car with a percentage charge of 30%, the taxable benefit would be £8,340 for 2023/24 (£27,800 @ 30%).
- The income tax payable for a basic rate tax payer @ 20% on £8,340 would be £1,668.
- For a higher rate tax payer the tax charge @ 40% on £8,340 would be £3,336.
Van drivers are exempted from the fuel benefit charge if the van is used solely for business purposes
- If there is any significant private use of the van, drivers are taxed on a benefit of £757 in 2023/24.
The tax-free benefits
Though the use of a car and the value of the fuel are taxed, company car drivers do not pay extra tax on some other benefits. The cash value of these benefits often outweighs the cost of any car tax paid. Depending on the vehicle and its reliability, the value to the employee will be at least £600 a year, and could be much higher.
Knowing there will be no surprises in the shape of repair bills or insurance increases also allows employees to take motoring costs out of the family budget.
The benefits that escape extra tax are:
- maintenance and servicing
- road tax
- membership of a motoring organisation
3. Reducing tax costs
Employees and directors can reduce the tax paid on company vehicles in several ways.
Contribute up to £5,000 towards the cost of buying the car
- This reduces the taxable value (list price) of the car by the amount contributed.
- You will need to keep the car for several years before you save money. How long depends on the car's size and age, your tax rate and the amount contributed.
- In practice, this approach is not particularly tax-efficient. It is of most use to directors or owner-managers who want more expensive cars or who want to reduce the amount of capital the business has tied up in cars.
If you pay the full cost of fuel for private travel you do not have to pay private fuel tax
- This includes paying for fuel for journeys to and from work. Paying for only part of the fuel does not reduce the tax paid.
- Depending on the individual's circumstances, it may be worth accepting fuel for private use bearing in mind increasing fuel costs.
- For example, for a car emitting 130gm/km, and so subject to a 31% charge, a basic rate taxpayer would pay £1,723.60 in fuel benefit tax for 2023/24. If the private fuel they use costs £143 a month or less, they would be better off paying for their petrol.
- A 40% taxpayer driving a car with emissions of 215gm/km giving rise to a 37% scale rate would have a tax bill of £4,114.40 for 2023/24. They would have to be using petrol worth £343 a month to make it worthwhile accepting fuel for private use from the employer.
Sharing a car reduces the benefit each employee pays tax on
- The value of the benefit for each employee is reduced on a just and reasonable basis. For example, if two employees share a company car equally, normally each of them would be taxed on half the usual benefit.
- If the employees are also taxed on fuel provided for private use, the value of this benefit is reduced in the same way.
You are only taxed on the proportion of the year you use the car
- Tax due on fuel can also be worked out proportionately if you give up the 'free' fuel and so long as the fuel is not reinstated later.
Electric cars can be much more tax-effective
- The benefit-in-kind rate is minimal.
- The business also benefits from more favourable tax treatment on the purchase of the car (though the purchase cost will be higher than for a similar petrol or diesel car).
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4. No car or your own car?
Some staff will be better off without a company car. It depends on what the company offers.
Some companies offer employees extra salary instead of a company car
- This is worth considering if the company car has high emissions. The number of miles you drive on company business no longer reduces the tax charge. But it will affect your running costs.
Some companies provide benefits for employees who use their own cars for business
- These are normally paid as mileage allowances. The size of the allowance will be decided by the company.
- Companies may decide to pay the optional passenger rate of up to 5p a mile for each passenger. The passenger must be an employee who also needs to travel on business.
Employees who use their own cars usually receive a mileage allowance
- If mileage allowances are paid in line with the HM Revenue & Customs (HMRC) Approved Mileage Allowance Payments (AMAP), there is no tax or NIC liability.
- AMAP for all cars (and vans) are 45p a mile for the first 10,000 miles, and 25p a mile thereafter, unchanged since April 2011.
- The rate for employees who use their own motorcycles for business is 24p a mile.
Employees who do not receive full mileage allowances may claim relief on their tax return
- The relief is given on the difference between the AMAP and the amount paid by their employer.
Other employer contributions to the running costs of employees' cars are taxable
- But employees can claim a tax deduction, using AMAP.
5. Tax for employers
Employers must pay Class 1A National Insurance contributions on the benefits
- Contributions are based on the taxable value of cars and fuel given to employees.
- The rate of contributions is 13.8%.
- Employers must use the car benefit and fuel scale charges when calculating these.
The tax due on company cars and private fuel is collected through PAYE
- You can include car benefits in payroll by registering with HMRC before the start of the tax year. If so, you do not need to use form P46.
- If you are not payrolling car benefits you must notify HMRC of any changes in company car use every quarter on form P46 (Car), due on the fifth day of February, May, August and November. There are penalties if you miss the deadlines.
There are additional rules regarding VAT
- Employers can recover VAT on fuel used for business purposes only. This applies even if an employee pays for the fuel and then claims the cost on expenses.
- Employers who provide fuel for private use at or below cost can recover VAT on the fuel purchase, but must then pay VAT following the set fuel scale charges. These are based on the car's CO2 emissions.
- Employers do not have to apply the scale charges if they do not recover VAT on the purchase of private fuel.
- Employers do not account for VAT if they charge employees for the use of cars.
6. Buying company cars
Businesses can claim the cost of purchase through capital allowances
- This reduces taxable profits, or increases taxable losses, over several years.
- The capital allowance you can claim is based on the car's CO2 emissions. For 2023/24, new cars with emissions below 50g/km go into the main rate pool of 18% whilst new cars with emissions greater than 50g/km go into the special rate pool of 6%.
- Businesses can claim 100% first year allowances on zero-emission cars and new zero-emissions goods vehicles purchased for business use.
- Sole traders who buy cars for business and private use can only claim the business portion of the writing-down allowance.
Some costs attract full tax relief
- Maintenance and other running costs.
- Interest paid on a loan to buy the car.
A business cannot normally recover VAT on the purchase of a new car
- To recover VAT you must be able to prove that the car is for business use only.
- Typically, car dealers and leasing firms are the only businesses able to recover VAT.
7. Leasing company cars
Tax deductions depend on the CO2 emissions of the car
- All the costs of leasing can be deducted from taxable profits as expenses for leased cars with CO2 emissions below 50g/km.
- There is a flat rate disallowance of 15% of relevant payments for leased cars with CO2 emissions above 50g/km.
Only 50% of the VAT charged on rentals can normally be claimed
- You may be able to reclaim 100% if the car is used wholly for business purposes.
Capital allowances can only be claimed if there is an option to purchase the car
- Find an ICAEW chartered accountant, an ACCA accountancy firm, an ICAS chartered accountant or a CIMA management accountant for advice on company cars.
- Find guidance on taxable benefits for company cars and company vans from HMRC.
- Find guidance on reclaiming VAT on business vehicles.
- Find guidance on capital allowances for business vehicles on GOV.UK.
"The company car is an important part of many remuneration packages and can provide a powerful incentive for some employees." - Steve Connor, Shepley Window Systems Company