Company cars are a popular benefit for many employees, but they come with tax implications.
Both employers and employees must be aware of how these vehicles impact finances.
There’s a lot to consider, from benefit-in-kind rates to the importance of CO2 emissions and the intricacies of P11D forms. This guide breaks down the essentials, clearly explaining what company cars mean for your tax obligations.
Whether you’re a business owner considering offering company cars or an employee receiving one, here’s what you need to know.
Tax assessment on company cars
When an employer provides an employee with a company car that’s available for both business and personal use, including commuting, it’s considered a benefit-in-kind (BiK) by HMRC.
Consequently, there’s a tax implication for both the employer and the employee.
Here’s a closer look at how it all works:
Company car as a BiK
BiK reflects the value of perks or benefits an employee receives aside from their salary. A company car is one such perk.
Taxation methods:
- Payroll method: The car’s cash value is computed, added to the employee’s regular earnings, and then taxed through the monthly payroll. This process ensures that tax is regularly deducted, making it hassle-free for both employers and employees.
- P11D form: Employers can opt to detail the BiK benefits, including those from company cars, on the P11D form, which needs to be submitted annually by 6 July after the end of the tax year in which the benefit was provided.
Factors influencing company car tax
The tax payable on a company car depends on its BiK value, determined by:
- The car’s make and model.
- The car’s list price, including any optional extras, delivery charges and car tax for the first year, but minus any employee contributions towards the car.
- The car’s fuel type.
- The car’s CO2 emissions.
- The periods that the car is available for personal use.
BiK rates and taxation
The BiK value is determined by multiplying the P11D value with the appropriate BiK percentage which is based on the car’s CO2 emissions. The BiK percentage works on a sliding scale where higher CO2 emissions result in a higher BiK percentage.
The GOV.UK website offers a handy calculator for estimating company car tax and any related fuel benefits.
The resulting BiK value is then subject to tax based on the employee’s income tax bracket – be it basic rate (20%), higher rate (40%), or additional rate (45%).
In addition, the employer is charged Class 1A National Insurance on the value of the benefit – the current rate of this is 13.8%.
Strategies for tax-efficient company cars
Electric vehicles
Electric cars come with significant tax savings when provided as BiKs. For example, in the fiscal year 2023/24, a fully electric vehicle can boast a BiK rate as low as 2%. This compares very favourably with non-electric vehicles where the BiK rate can reach as high as 37% of the list price.
This favourable rate is locked in until 2025, translating to minimal monthly tax deductions.
Plug-in hybrid electric vehicles (PHEVs)
PHEV vehicles combine the power of a conventional engine with an electric motor.
The BiK rate for PHEVs is determined by two crucial metrics: the vehicle’s CO2 emissions and its electric range.
Cars emitting fewer pollutants and boasting a more extended electric driving range benefit from reduced BiK rates.
Capital allowances for company cars
Capital allowances allow businesses to claw back some of the costs of substantial investments – in this context, company cars. Essentially, these allowances reduce your total taxable profits and your tax bill.
- CO2 emissions: Much like the BiK tax system, cars that emit fewer CO2 emissions bask in the capital allowance spotlight. Companies that prioritise the environment, in turn, see tangible financial advantages.
- New vs. used: A car’s history plays its part. While a shiny new vehicle might be enticing, the allowances can differ compared to a used one. It’s worth weighing up the benefits.
- Usage intent: Here’s where purpose becomes pivotal. Cars that are utilised purely for business operations typically qualify for higher capital allowances. Any inkling of personal use, though, can alter the equation.
In summary
A company car, while beneficial, comes with its set of tax implications.
Whether it’s electric, diesel, or petrol, the nuances of tax can differ, and there are many rules to adhere to and costs to report.
If you’re confused about how to provide company cars while minimising tax, we can help.
Contact us to find out how we can help you navigate company cars, BIKs, capital allowances, and more.