Providing a car to an employee or director can be a valuable benefit. However, it also gives rise to specific tax implications for both the employer and the employee. Understanding how company cars are taxed helps you make informed decisions that are cost‑effective and compliant.
A company car is any vehicle provided by the employer for the personal use of an employee or director. Personal use includes:
Travel between home and work
Any private journeys
Use by family or friends
If a car is available for personal use, it usually creates a benefit‑in‑kind (BIK) for tax purposes.
When an employee is provided with a company car that they can use personally, HMRC treats this as a taxable benefit. The value of the benefit depends on:
The list price of the vehicle (including extras)
The car’s CO₂ emissions
Fuel type (petrol, diesel, electric, etc.)
Vehicles with lower emissions or electric cars typically attract lower BIK rates, making them more tax‑efficient.
The BIK value is calculated by applying a percentage (linked to emissions) to the list price. This figure is then added to the employee’s taxable income, and they pay income tax at their marginal rate.
Diesel cars may have a higher BIK rate unless they meet specific emission standards. This means that diesel‑fueled company cars can be more expensive from a tax perspective compared to petrol or electric cars.
Fully electric cars generally attract much lower BIK rates — often significantly less than their petrol or diesel equivalents. This has made electric vehicles particularly popular as company cars for tax‑efficient employee benefits.
If the employer also pays for the employee’s private fuel (not just business fuel), an additional BIK arises. This is separate from the car benefit and is calculated based on a fixed amount multiplied by the appropriate BIK percentage.
To avoid this charge, many employers require employees to reimburse the cost of private fuel.
Providing a company car can also have implications for the employer’s National Insurance Contributions (NICs). Employers usually pay Class 1A NICs on the value of the taxable benefit.
This cost should be considered when deciding whether to include cars as part of an employee’s remuneration package.
Some employers choose to provide a car allowance instead of a company car. A car allowance:
Is treated as taxable income
Is subject to Income Tax and National Insurance
Does not give rise to a vehicle benefit
While an allowance provides flexibility to the employee, it may not always be more cost‑effective than a company car, especially where tax‑efficient vehicles (like electric cars) are used.
With environmental concerns and tax incentives in mind, many businesses are shifting towards electric or low‑emission cars. These vehicles can offer:
Lower BIK tax rates
Reduced fuel benefit charges
Potential business cost savings
Enhanced green credentials for the company
Choosing vehicles with lower emissions may be both tax‑efficient and aligned with sustainability goals.
To ensure correct calculation and reporting of car benefits:
Maintain accurate records of car provision
Document private versus business mileage
Record fuel payments and reimbursements
Keep vehicle specification details for BIK calculations
Accurate documentation helps prevent errors in tax reporting and supports compliance in the event of an HMRC enquiry.
Company car taxation can be complex, especially when balancing cost, employee benefits, and compliance.
Applegrow can assist you to:
Assess the tax efficiency of company car options
Compare company cars versus car allowances
Advise on low‑emission and electric car strategies
Calculate BIK and fuel benefit liabilities
Ensure accurate reporting and compliance with HMRC
Whether you are considering updating your fleet or reviewing your benefits package, Applegrow provides practical tax guidance for company cars.
Contact Applegrow Financial Advisors today for tailored advice on managing company car benefits and minimising tax liabilities.
