Company Cars: Perk or Pain?

The buzz of being offered a company car with your job soon fizzles away once you find out that it’s not a freebie!  It’s a cool perk, but it comes at a cost, and it’s a good idea to weigh up your options before deciding if it’s the right move for you. Employers provide company cars as a Benefit in Kind (perks and benefits they provide to their employees that are not included in their salary), and some of these are tax-free, for example, pension contributions and canteen meals. Benefits that are worth more, such as a company car, will incur tax.

How are they taxed?

HMRC regards the private use of company cars (including commuting) to be a Benefit in Kind (BiK), and the amount of tax you have to pay is calculated by looking at various things, including the list price of the vehicle, fuel type and CO2 emissions. For cars registered after 6th April 2020, they will be assessed against a stricter scale than vehicles registered before this.

These variables provide a cash value for the vehicle, which is included on the employee’s P11D each year, and taxed as part of the employee’s overall PAYE income. The rates range from 0% for a fully electric car up to a whopping 37.5% at the highest end. The reason for the big difference is that the government is encouraging the use of electric and ultra-low-emission vehicles. The more environmentally friendly the car, the less tax you will pay on the value of the benefit.

Examples

If you choose a petrol car with a value of £30,000 and emissions of 110g/km of CO2, it will fall into the band of 25% based on its CO2 emissions. Therefore, the taxable figure would be £7,500 (25% of £30,000). If you are a basic-rate taxpayer, you would have to pay £1,500 (20% of £7,500).  If you choose a company car with a diesel engine, you might also have to pay a surcharge of 4% as a result of its effect on air pollution.

But, if you had a fully electric car, you would fall into the 0% BiK rate for 20/21, so there would be no additional tax to pay! It pays to consider the environmental impact of your car choice.

As a business owner, you might also look at the cost of purchasing the cars outright versus leasing or providing employees with a car allowance. There are many variables to consider, depending on the usage of the cars in question.

We would love to assist you in navigating the tax implications of your chosen cars and advise on the most tax-efficient route for you and your company. Please give our team a call to see how we can help you.