A Comprehensive Guide to Company Cars

Published on October 02, 2023

Employee BenefitsCompany Car Tax

Dividends Tax

What is a Company Car?

A company car is a vehicle provided to employees by their employers for both business and personal use. This perk is typically offered to employees who need to travel extensively for work purposes. Unlike in the past, where companies often provided a limited choice of vehicles, employees today often have the option to choose from a list of approved company cars, which may include electric vehicles.

How Do Company Cars Work?

To qualify for a company car, employees are generally required to be permanent staff members with a specific need for the vehicle. It's crucial that the provision of a company car does not result in the employee's salary falling below the national minimum wage. Employees who use a company car for personal use are subject to Benefit in Kind (BiK) tax.

Here's how the process typically works:

  1. Choose a company car from the list of approved models.
  2. The employer obtains a quote for the chosen vehicle, including options for maintenance and insurance.
  3. A credit check and financial application are often required to secure a business lease for the company car.
  4. Once approved, the order is finalized.
  5. Upon delivery of the car, the employee takes responsibility for it and signs relevant paperwork, acknowledging the company car scheme and associated payments.

To calculate your take home pay, you can use the following tool Take Home Pay Calculator.

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.

How Much Do Company Cars Cost?

The cost of company cars can vary significantly. Companies should consider their budget for providing this employee benefit. Most company car leases have fixed terms ranging from two to four years. The available options range from affordable and fuel-efficient cars, like those from Kia and Ford, to luxury cars from brands such as BMW, Mercedes, and Jaguar.

Understanding Company Car Tax

Company car tax, also known as Benefit in Kind (BiK) tax, is the amount an employee pays for the privilege of using a company car for personal purposes. Although employers cover the cost of the car on top of an employee's salary, it is considered a financial benefit, subject to taxation based on the vehicle's value.

BiK tax rates vary and are calculated based on factors such as the car's list price, fuel type, emissions, age, and engine size. The employee's personal tax bracket also influences the BiK tax rate. Both employees and directors/business owners who use a company car for personal and business travel are subject to this tax.

BiK tax rates are determined by HMRC and are reported on a P11D form, with the amount deducted from an employee's monthly salary. Using the HMRC's company car and car fuel benefit calculator is the best way to obtain an accurate tax estimate.

Minimizing Your Company Car Tax Bill

Reducing company car tax can be a significant concern for employees. Here are some strategies to lower your tax liability:

  1. Choose a low-emission vehicle: Vehicles with low or zero emissions have lower BiK rates, resulting in reduced tax charges.
  2. Use a pool car: Vehicles used exclusively for business travel are not subject to tax charges, and businesses can claim 100% VAT back on lease agreement instalments.
  3. Avoid optional extras: Adding features that increase a car's list price leads to higher BiK tax payments.
  4. Consider a pickup truck or van: Many of these vehicles are classified as light commercial vehicles, offering standard BiK rates that can save you money.
  5. Opt for a business edition fleet: Some car manufacturers offer specific car variants for large orders of company cars, helping reduce the overall BiK value.

How Are Company Cars Financed?

Company cars are typically financed through a business. In most cases, the company leases vehicles for employee use, relieving individuals of financial obligations. The company is responsible for monthly payments, as well as maintenance, servicing, and MOT requirements.

Can You Use a Company Car for Private Use?

Yes, company cars can be used for personal travel, including commuting to work. However, if a company car is used for both business and personal purposes, BiK tax applies. The tax rates may vary depending on the car's CO2 emissions and other factors, making low or zero-emission vehicles a more tax-efficient choice.

Calculating the P11D Value

Company cars are considered a benefit, and employers use a P11D form to calculate the tax charge associated with this benefit. The BiK tax calculation takes into account various factors, including the car's list price, age, fuel type, CO2 emissions, engine size, and the employee's earnings and personal tax bracket.

To accurately determine the BiK tax, it's recommended to use HMRC's company car and car fuel benefit calculator.

Below are the current BiK rates, applicable until 2024-25:

CO2 (g/km)Electric Range (miles)2022-23 (%)2023/24 (%)2024/25 (%)2025/26 (%)
0N/A2223
1-50>1302223
1-5070-1295556
1-5040-698889
1-5030-3912121213
1-50<3014141415
51-5415151516
55-5916161617
60-6417171718
65-6918181819
70-7419191920
75-7920202021
80-8421212122
85-8922222223
90-9423232324
95-9924242425
100-10425252526
105-10926262627
110-11427272728
115-11928282829
120-12429292930
125-12930303031
130-13431313132
135-13932323233
140-14433333334
145-14934343435
150-15435353536
155-15936363637
160-16437373737
165-16937373737
170+37373737

*The rates above apply to vehicles registered after April 2021.

Company Car Leases at Leasing Options

Business leases are a great option for employees and business owners who regularly travel for work. So, if you're looking to expand your company car scheme and need advice on the best options, chat with our team for further details.

Sources

GOV.UK

What is BIK (benefit in kind) car tax and how do I calculate it?

How Does Company Car Tax Work?

Your complete guide to BIK Tax

Company car tax guide 2023/2024

Company Car Tax explained