A company car can be a great job perk to offer employees, usually provided to staff on permanent contracts whose jobs require extensive travel, such as travelling salespeople or employees who work at multiple locations. However, company cars impact the amount of tax paid by both the employer and the employee driving it.
Several factors decide how much tax is due on a company car, from the list price of the vehicle to the CO2 emissions it creates and the type of fuel used. That’s why it’s important to calculate exactly how much tax you pay to ensure you explore all your options and choose a vehicle that genuinely benefits your staff and your business.
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How does paying tax on a company car work?
A company car is a vehicle provided by an employer to be used by an employee for private and business purposes, including commuting.
HMRC class company cars as a Benefit-in-Kind, often shortened to BIK, which means the employer and its employee must pay tax and NICs on it, based on values defined by the government. In addition, any fuel benefit provided by the employer is also subject to tax.
There are two ways of calculating and paying tax on a company car. The first is by calculating the car’s cash value, adding it to the employee’s salary, and then taxing it through payroll. Alternatively, the employer can declare the BIK by submitting a P11D form at the end of the tax year.
Unfortunately, for the employee whose salary is close to the tax band threshold, a company car could push them into the higher tax band, raising the rate of tax they pay overall, thus reducing the benefit of having a company car.
The P11D form summarises the value of all the employee’s BIK, which along with a company car, can also include benefits such as medical insurance or childcare vouchers. HMRC then calculates the tax due to be paid on BIKs based on this information.
The P11D value of the company car is based on three factors:
- The list price of the car, including VAT and optional extras
- Delivery charges, excluding the registration fee
- The first year of car tax
The higher the P11D value of the company car, the more tax must be paid.
You can use the gov.uk calculator to get an estimate of the amount of company car tax due to be paid to HMRC, as well as the tax on fuel benefits. To use this calculator, you’ll need to include information about the employee’s other income and tax information, as this affects the amount due.
How much tax do you pay for a company car?
The amount of tax to be paid on a company car is calculated by multiplying the P11D value by the CO2 emission bracket it falls into, which gives you its Benefit-in-kind (BIK) value.
| Vehicle CO2 (g/km) | Electric Range (miles) | FY 2021/22 [Standard] | FY 2021/22 [non-RDE2 Diesel*] | FY 2022/23 to 2024/25 [Standard] | FY 2022/23 to 2024/25 [non-RDE2 Diesel*] |
|---|---|---|---|---|---|
| BIK Percentage | BIK Percentage | BIK Percentage | BIK Percentage | ||
| 0 | 1% | – | 2% | – | |
| 1 – 50 | 130+ | 2% | 6% | 2% | 6% |
| 1 – 50 | 70-129 | 5% | 9% | 5% | 9% |
| 1 – 50 | 40-69 | 8% | 12% | 8% | 12% |
| 1 – 50 | 30-39 | 12% | 16% | 12% | 16% |
| 1 – 50 | Up to 30 | 14% | 18% | 14% | 18% |
| 51 – 54 | 15% | 19% | 15% | 19% | |
| 55 – 59 | 16% | 20% | 16% | 20% | |
| 60 – 64 | 17% | 21% | 17% | 21% | |
| 65 – 69 | 18% | 22% | 18% | 22% | |
| 70 – 74 | 19% | 23% | 19% | 23% | |
| 75-79 | 20% | 24% | 20% | 24% | |
| 80 -84 | 21% | 25% | 21% | 25% | |
| 85 – 89 | 22% | 26% | 22% | 26% | |
| 90 – 94 | 23% | 27% | 23% | 27% | |
| 95 – 99 | 24% | 28% | 24% | 28% | |
| 100 – 104 | 25% | 29% | 25% | 29% | |
| 105 – 109 | 26% | 30% | 26% | 30% | |
| 110 – 114 | 27% | 31% | 27% | 31% | |
| 115 – 119 | 28% | 32% | 28% | 32% | |
| 120 – 124 | 29% | 33% | 29% | 33% | |
| 125 – 129 | 30% | 34% | 30% | 34% | |
| 130 – 134 | 31% | 35% | 31% | 35% | |
| 135 – 139 | 32% | 36% | 32% | 36% | |
| 140 – 144 | 33% | 37% | 33% | 37% | |
| 145 – 149 | 34% | 37% | 34% | 37% | |
| 150 – 154 | 35% | 37% | 35% | 37% | |
| 155 – 159 | 36% | 37% | 36% | 37% | |
| 160+ | 37% | 37% | 37% | 37% | |
The BIK value is then multiplied by whatever income tax bracket the employee’s salary is in. This is either the Basic Rate of 20% tax, the Higher Rate tax band of 40%, or the Additional Rate tax band of 45%.
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.
How can I reduce my company car tax?
One effective way of lowering your company car tax rate is to provide an electric car. An electric vehicle (EV) has a BIK rate of only 2% for 2023/24, fixed until 2025. This reduces the tax rate to just a few pounds per month.
The next best thing to an EV for reducing the company car tax bill is a plug-in hybrid vehicle (PHEV), which runs on a combination of traditional fuel and an electric motor. The PHEV BIK rate is dependent on the vehicle’s C02 emissions and electric range, and cars producing lower emissions and with a longer range can qualify for a lower BIK percentage.
The most expensive company cars to tax are high-emitting, high-fuel use cars, as HMRC has become increasingly tough on emissions in recent years. Those top emission-generating vehicles can cost up to three times as much in tax as a PHEV 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.
These alternatives give employees the choice of 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
As an alternative to a company car, 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, such as road tax, repairs, maintenance and breakdown cover, 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.
What can I claim as travel expenses?
Employees cannot claim a mileage allowance from HMRC if they are driving a company car. However, company car drivers can claim fuel expenses for all business mileage where the employee has paid for the fuel. Business mileage for personal journeys made in a company car cannot be claimed.
Whoever owns the car is responsible for paying to insure the vehicle, which in this case is the employer. The employer can also cover maintenance and repairs.
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 which is £27,900 for the 2023/24 tax year up from £25,300 for the 2022/23 tax year. This 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:
| Tax year | Fixed figure (£) |
|---|---|
| 2023/24 | 27,900 |
| 2022/23 | 25,300 |
| 2021/22 | 24,600 |
| 2020/21 | 24,500 |
| 2019/20 | 24,100 |
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. For companies that want to project a particular image, having their employees drive their chosen vehicles can contribute to this. There are even specialist luxury company car fleets to choose from.
In the past, companies often had a fleet of vehicles from which employees would be allocated a car. However, in recent times, many companies have switched to providing 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’s generally cheaper to pay the tax on a company car than to lease the same car from a private source. However, if the employee has a particular preference for a car that is not provided by the employer or already owns a car they are happy with, then a company car is less of an attractive benefit.
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 have a choice. They 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 2023/24, 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.
Calculating your company car tax can be complex. For further advice and information regarding company car tax and how DS Burge & Co can help, get in touch with our friendly team of accountants today.