Navigating the Tax Implications of Company Cars: A Guide for UK Businesses

Providing company cars as a perk for employees, including directors, can be a great incentive, but it comes with a range of tax implications that UK businesses need to navigate carefully. At Munro Bowman, we aim to simplify these complexities and help you make informed decisions about company vehicles.

What Is a Company Car?

A company car is a vehicle provided by an employer for personal and business use. While it can enhance employee satisfaction and business image, the tax treatment of these vehicles can significantly impact both the employer and employee.

How Are Company Cars Taxed?

The tax implications of company cars primarily affect employees through Benefit-in-Kind (BIK) taxation and employers through National Insurance Contributions (NICs). Here’s an overview:

1. Benefit-in-Kind Tax for Employees

When an employee has access to a company car for personal use, it is considered a benefit in kind. The taxable amount is based on:

• The car’s list price (not purchase price or lease cost).
• CO2 emissions: Low-emission vehicles attract lower tax rates.
• Fuel type: Electric and hybrid vehicles typically have lower rates compared to petrol or diesel cars.

BIK tax is calculated as:

List Price × CO2 Emissions Percentage × Income Tax Rate

For example:

• A petrol car with a list price of £20,000 and a CO2 emissions percentage of 20% would have a BIK value of £4,000.
• If the employee pays income tax at the basic rate (20%), the tax due would be £800 annually (£4,000 × 20%).

2. National Insurance Contributions for Employers

Employers must pay Class 1A NICs on the BIK value of company cars. The rate is currently 13.8% of the taxable BIK amount. Using the above example, an employer would pay NICs of £552 annually (£4,000 × 13.8%). 

Note: The Class 1A NIC rate is due to increase for the 25/26 tax year to 15%.

Tax-Efficient Alternatives

With the increasing focus on environmental sustainability and rising costs, many businesses are exploring tax-efficient vehicle options:

1. Electric Vehicles (EVs)

Electric vehicles are currently the most tax-efficient choice:

• BIK Tax: For 2024/25, the BIK rate for EVs is just 2%.
• NIC Savings: The low BIK value means lower NICs for employers.
• Capital Allowances: 100% First-Year Allowance is available for new EV purchases.

2. Salary Sacrifice Schemes

A salary sacrifice scheme allows employees to forgo a portion of their salary in exchange for a low-emission vehicle. This reduces both employee income tax and employer NIC liabilities.

3. Pool Cars

If a vehicle is only used for business purposes and is not available for private use, it can be classified as a pool car, avoiding BIK taxation. Strict criteria apply, so maintaining accurate records is essential.

Key Considerations for Employers

When deciding whether to offer company cars, consider:

• Employee preferences: Would they prefer cash allowances instead?
• Environmental goals: Does your fleet align with sustainability targets?
• Cost management: Are lease or purchase options more viable for your business?
• Record-keeping: Accurate mileage logs are essential to avoid tax disputes.

How We Can Help

At Munro Bowman, we’re here to help you assess the financial impact of company cars and identify the most tax-efficient strategies for your business. From calculating BIK tax to exploring EV incentives, we’ll guide you through every step.

Contact us today to discuss how we can support your business’s vehicle strategy and keep your tax liabilities in check.