Company cars can be a win-win arrangement for both employers and employees. They attract staff by offering an appealing perk, which can lead to greater job satisfaction and loyalty, and help employers retain their valued employees.
If you’re weighing up whether a company car is worth it, there’s no straightforward answer. It largely depends on your personal circumstances, how the vehicle is going to be used, and the tax implications that come with it.
We’ve prepared this handy guide for employers and employees to help them understand company car schemes and Benefit in Kind tax and assess whether a company vehicle is the most cost-effective choice for their situation.
What is a company car?
A company car is a vehicle that an employer provides for work. Depending on the type of scheme, it may be used exclusively for business travel or for both business and personal journeys. Usually, the company leases or buys the car outright as part of the employee’s overall benefit package, but this isn’t always the case.
Company cars may be an exciting perk, but it’s a good idea first to understand your potential Benefit in Kind tax responsibilities as an employee or employer. This will help prevent you from running into any unexpected costs or tax issues later on.
Understanding company car tax and Benefit in Kind
Using a company car for personal use (even just commuting) is considered a Benefit in Kind. This means that as an employee, you’ll be expected to pay tax on it. Keep in mind that employers also pay Class 1A National Insurance based on the value of the benefit, which in this case is the new vehicle.
As an employee, the amount of BIK tax you pay depends on the car’s value (also known as the P11D value), its CO2 emissions, your Income Tax band, and whether your employer provides fuel. This is often referred to as fuel benefit tax.
How is BIK tax calculated on company cars?
Benefit in Kind car tax is calculated using the following method:
P11D value x BIK rate x Income Tax rate = annual BIK tax
- The P11D value is the list price of the car, including VAT and any delivery charges.
- The BIK rate is set by the UK government and is based on CO2 emissions and fuel type.
- Your Income Tax rate (basic, higher, or additional) determines how much tax you’ll ultimately pay.
The cleaner the car (as in CO2 emissions), the lower the rate, which is why electric vehicles or hybrid cars often come with much better tax savings.
What’s better – company car or cash allowance?
Sometimes, businesses offer cash allowances instead of company cars. This is a top-up to your annual salary designed to help cover the cost of using your personal vehicle for business travel or to go towards the cost of buying one.
Whether you go down the allowance or company car route depends on your lifestyle — how much do you drive for work? What is your tax bracket? And do you have a preference for the type of vehicle? Factor these questions into your decision and weigh up the pros and cons carefully.
Company car scheme
With a company car scheme, your employer pays for the vehicle on your behalf, giving you access to a car without the upfront cost. In most cases, the business takes care of running costs like maintenance, insurance, breakdown cover, and road tax, so all you need to think about is driving it.
This hands-off setup is ideal if you prefer convenience and predictable monthly costs. Plus, there may be tax efficiencies for the employer through business contract hire and allowable tax deductions. However, as the car is considered a Benefit in Kind, as the employee, you’ll need to pay company car tax, which is calculated based on the car’s list price and emissions.
Car allowance
A car allowance gives you a bit more control. Instead of a company car from your employer, you receive an extra payment as part of your gross salary, which goes towards the cost of using your own vehicle for business purposes. This gives you the freedom to buy or lease a car outright or drive your own car.
While you’ll have more flexibility, you’ll also have more responsibility, as you’ll have to cover all the costs yourself, including insurance, fuel, and repairs. And, because the allowance counts as income, it may increase the amount of tax you pay if it pushes you into a higher tax band. For some people, especially high-mileage drivers, this option can still be cost-effective, but it depends on the vehicle you choose and how much you’re driving it for work.
Pros and cons of a company car
Still unsure if a company car is the right move? This quick breakdown of the pros and cons should help you make sense of the key differences at a glance.
| Pros | Cons |
|---|---|
| Less admin and maintenance responsibility | You never own the vehicle |
| New car with no upfront cost to the employee | You pay BIK tax on personal use |
| May include extras (like servicing, MOT, insurance, and breakdown cover) | You don’t get to choose the type of personal car |
| Lower BiK tax for low-emission vehicles | Higher BIK tax for high-emission vehicles |
| No need to worry about depreciation costs | |
| Great for high-mileage business use | |
| Get a new car every few years |
Are electric cars worth it for businesses?
With better BIK rates, pure electric cars and low-emission vehicles can provide a smart choice for businesses, especially for directors or staff who use company cars for personal trips. Electric vehicles also cut down fuel costs and avoid road tax (for now).
As the UK moves towards its net-zero goals, electric range and the number of charging stations are improving, making them more practical for daily business use. But it’s important to consider your particular situation. Think about your usual mileage, access to charging, and how you will use the vehicle for both work and personal purposes.
Need some expert advice?
We understand it’s a big decision, whether you’re an employee weighing up your options or an employer building a company car scheme.
At Ascott Blake, our experienced tax and accounting specialists will help you calculate the true cost of a company car, understand the potential savings, and find the best option based on your individual circumstances.
Call us today on 01279 797 222 or complete our contact form to find out what we can do for you.
Frequently asked questions about company cars
Does a company car affect my personal tax return?
The BIK amount is added to your gross salary, and you will need to pay tax. So if you handle your own taxes or HMRC hasn’t adjusted your tax code correctly, you will need to report the benefit on your personal tax return.
Do I pay BIK tax if I only use the car for work?
If you use the car only for business travel and never for personal use (including getting to and from work), it might not be subject to BIK tax. But HMRC does have strict rules on tax, so you must be able to provide evidence that there is no personal use.
Can I choose my own car under a company car scheme?
It really depends on the options your employer offers. Some employers provide a variety of choices or allow you to lease a vehicle through salary sacrifice schemes, while others have fewer options based on their budget or environmental policies.
