Company cars can be a win for both employers and employees. Employers can tempt in talent with the perk that tops up brand image, while employees get a new car they can also utilise for personal use.
Sales for company cars are continuing to accelerate back almost to pre-pandemic levels but there’s a big difference between now and then. Company cars have gone green. In the first half of 2022, 20 per cent of car leases were all-electric cars – a 1575 per cent increase on 2018. In the tax year ending 2021, just 2 per cent of company cars had carbon emissions of 165 g/km – 20 years ago that figure was 58 per cent.
What is a company car?
Company cars are bought by employers and given to employees who travel extensively in their role. Employees can use the vehicle for professional and personal use as a perk.
The process can work two ways: either the employer buys the car and lends it to the employee for the period of their employment or the employee chooses and buys directly (from an eligible list) and leases it from the company.
Who is eligible for a company car?
Company car eligibility varies depending on company policy. Usually, they will be offered to employees that need to travel frequently, like regional sales managers. However, they can also be offered as a benefit to entice candidates into a role.
“To qualify for a company car scheme, employees usually need to be in a significant or permanent position within the business and have a regular work pattern,” Keith Hawes of Nationwide Vehicle Contracts confirms. “Also, once they join the scheme, their wages must not drop below the national minimum wage.”
Is the tax better for electric company cars?
Yes. Company cars with lower CO2 emissions are subject to lower tax rates under the benefit in kind (BIK) tax system. Electric cars, which have zero CO2 emissions, have the lowest tax rates while cars with high emissions have the highest tax rates.
“In addition to tax incentives, many environmentally friendly cars are also eligible for other perks such as reduced parking fees or exemptions from congestion charges in some cities,” Hawes says.
What do I need to look for when choosing a company car?
The main factors to take into consideration – and what we have in this list – include comfort (you’ll need that for the long journeys across the country), something eco-friendly (but won’t leave you stranded without charging points) and therefore something tax friendly.
It is worth noting that what seem like trivial differences can have an impact on the BIK tax you pay. Different sized alloy wheels, for example, impact CO2 emissions and therefore tax rate.
How does the company car process work in terms of what employers/employees pay?
Typically, the employer will cover the cost of purchasing or leasing the vehicle, insurance, maintenance and repairs. They may also cover the cost of fuel, but in most cases only for business-related travel.
The employee must pay the BIK tax. This is based on the vehicle’s list price, the employee’s income tax band, age of the car, fuel type, CO2 emissions and engine size.
“In some cases, the employee may be offered a cash allowance in lieu of a company car,” Hawes adds. “This allows the employee to choose their own car and cover the expenses themselves. The cash allowance is typically calculated based on the cost of a typical company car that the employee would be eligible for.”
What are the tax benefits?
Hawes says there are several tax benefits of company car leasing, including:
- Tax-deductible lease payments: Lease payments for company cars are generally tax-deductible as a business expense. This means that the company can deduct the full amount of the lease payments from their taxable income, reducing the amount of tax they owe.
- Reduced tax liability for employees: If an employer provides a company car for personal use, the employee is typically liable for paying tax on the value of the car as a benefit in kind. However, the amount of tax owed is usually lower for leased cars than for purchased cars, as the value of the car is based on the monthly lease payments rather than the purchase price.
- VAT reclaims: If a company is VAT-registered, they can usually reclaim the VAT on the monthly lease payments for a company car. This can help to reduce the overall cost of the car for the company.
- Capital allowances: Companies can also claim capital allowances on leased cars, which allows them to deduct the cost of the car from their taxable profits over a period of several years.
“Before considering a company car scheme, we’d advise employers to consult with a tax professional to understand the specific tax implications of leasing a company car.”
Do you need to tell HMRC you have a company car?
Yes. As an employer, you must let HMRC know of any cars you lease to employees.
You will need to send them a P46 form for any changes such as leasing a car to a new employee, stopping the lease, replacing a car or adding additional cars to a fleet.
There are deadlines throughout the year you need to update HMRC by and some exceptions on the gov.uk site, here.
What are the advantages and disadvantages of company cars?
- Allows employees to travel for work without using a personal vehicle, saving on wear and tear
- Tax benefits involved, especially if it’s an eco-friendly model
- The car model tends to be new for brand image, which means less should go wrong and employees benefit from a high quality vehicle
- Saves the employee from paying for insurance or repair costs
- Bigger draw to potential employees
- Encourages eco-friendly car sales
- Borrowing or leasing a car cheaply can be great, but with it comes a lot of responsibility – the employee can be liable for at-fault accidents
- Smaller range of vehicles to choose from compared to a personal purchase