As a firm of chartered accountants, we understand that providing company cars to employees is a popular and often necessary perk for businesses. However, it comes with a set of tax and financial implications that both employers and employees need to be aware of. Here, we’ll explore these implications in detail to help you make informed decisions if you are considering providing company cars.
Taxation on Company Cars
Benefit-in-Kind (BIK) Tax: When an employer provides a company car for private use, it is considered a taxable benefit. The Benefit-in-Kind (BIK) tax is calculated based on several factors:
- The list price of the car: This is the manufacturer’s recommended retail price, including VAT and any optional extras.
- CO2 emissions: Cars with lower CO2 emissions are taxed at a lower rate. The government encourages the use of environmentally friendly vehicles through a sliding scale of tax rates based on emissions.
- Fuel type: Diesel cars traditionally attract a higher BIK rate due to their higher NOx emissions, although cleaner diesel vehicles can be subject to a lower rate.
For example, an electric car with zero emissions benefits from significantly lower BIK rates, making it a cost-effective option for both employers and employees.
Fuel Benefit: If the employer also pays for the employee’s private fuel, this is an additional taxable benefit. The fuel benefit is calculated by multiplying a fixed amount (£27,800 for the 2024/25 tax year) by the car’s BIK rate. It’s crucial to consider whether providing fuel for private use is financially beneficial for both parties.
Employer’s National Insurance Contributions (NICs)
Employers are required to pay Class 1A NICs on the value of most taxable benefits provided to employees, including company cars. The NIC rate for 2024/25 is 13.8%. Therefore, it’s important to account for these additional costs when providing company cars.
Capital Allowances
Employers can claim capital allowances on the cost of purchasing a company car. The rate at which these allowances can be claimed depends on the car’s CO2 emissions:
- 100% First Year Allowance (FYA): Available for new, zero-emission cars.
- 18% Writing Down Allowance (WDA): Available for cars with CO2 emissions up to 50g/km.
- 6% Writing Down Allowance (WDA): For cars with CO2 emissions above 50g/km.
These allowances, especially on new, zero-emission cars, can significantly reduce the taxable profits of a business, making the choice of car an important strategic decision.
VAT Implications
VAT recovery on the purchase and running costs of company cars is generally restricted to business use only. However, if the car is used exclusively for business purposes (with no availability for private use), full VAT recovery is possible. Accurate record-keeping and a clear policy on car usage are essential to maximise VAT recovery.
Choosing the Right Company Car
When choosing a company car, consider the following:
- Total Cost of Ownership (TCO): Include all costs such as purchase price, fuel, maintenance, insurance, and taxes.
- Employee Preferences: While a more environmentally friendly car might be cheaper in terms of BIK tax, it should also meet the needs and preferences of the employees.
- Environmental Impact: With increasing emphasis on sustainability, choosing lower-emission vehicles can enhance the company’s corporate social responsibility profile.
Conclusion
Providing company cars can be a valuable benefit for employees, but it’s essential to understand the tax and financial implications involved. By carefully considering these factors, employers can make informed decisions that benefit both the business and its employees.
At Porter Garland, we are dedicated to helping you navigate these complexities. For personalised advice tailored to your specific circumstances, please contact us on 01276 674870.
Porter Garland are your firm of Chartered Accountants of Choice’ servicing: Camberley, Frimley, Farnborough, Aldershot, Farnham, Fleet and the surrounding area.