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Company Car Benefit – Definition, Advantages, and Tax Implications

What is company car benefit?

Company car benefit refers to the benefit employees receive when their employer provides them with a car for both business and personal use. This is considered a taxable benefit-in-kind (BIK) and is taxed depending on a number of criteria, including the car’s worth, CO2 emissions, and type of fuel. It is a common bonus that may assist employees with their mobility needs while also benefiting both the business and the employee.

Taxation of Company Car Benefit

Employees who utilize a corporate car for personal purposes must pay tax on the advantage obtained. The tax is determined according to the following:

P11D Value: The car’s list price, including VAT and optional extras, minus first-year registration costs and road tax. The higher the P11D value, the greater the tax burden.
CO2 Emissions: Lower CO2 emissions lead to lower tax rates, whereas larger emissions result in higher tax costs. The government encourages the usage of environmentally friendly cars by providing reduced tax bands for them.
Benefit-in-Kind (BIK) Rate: HMRC determines the Benefit-in-Kind (BIK) rate based on the car’s CO₂ emissions and fuel type. Petrol and diesel cars have a higher BIK rate than hybrid and electric cars.
Employee’s Income Tax Rate: To calculate the employee’s income tax rate, multiply the car’s taxable value by their tax band (20%, 40%, or 45%). Higher earners will have higher tax responsibilities.
Fuel Benefit Charge: The Fuel Benefit Charge occurs if an employer covers the cost of gasoline for private usage, resulting in an extra taxable benefit based on a specified multiplier determined by HMRC. Employees should consider if taking fuel benefits is cost-effective, considering the tax implications.

Advantages of a Company Car:

A business car provides several benefits to both employees and companies. Key benefits include:

Cost Savings for Employees: Employee cost savings include upfront car expenditures, insurance, maintenance, and servicing. These costs are covered by the employer, making this a cost-effective choice.
Convenience and Professional Image: Employees don’t have to worry about car depreciation, resale, or financing. A company-provided car also improves the professional image, particularly in client-facing professions.
Increased Employee Satisfaction: Offering a corporate car can improve job satisfaction and retention as a desirable workplace benefit.
Branding and Business Mileage Efficiency: Company-branded vehicles boost brand visibility and improve business mileage efficiency. Reliable transportation for business trips increases efficiency and production.
Potential Tax Deductions for Employers: Employers can claim tax deductions for leasing or purchasing business cars. Employers may take advantage of tax breaks while offering incentives to their employees.

Alternatives to a Company Car Benefit:

For employees or employers looking for alternatives, other ways to give transportation perks include:

Car Allowance: Employees receive a monetary allowance to purchase or lease their own vehicle instead of using the corporate car. This gives employees greater freedom in selecting a car that meets their demands.
Pool Cars: Pool cars are shared company cars for business usage solely, reducing personal tax costs. Employees can utilize the cars as needed without incurring individual tax burdens.
Mileage Reimbursement: Employees can claim their own car mileage expenditures. This is appropriate for folks who occasionally travel for work.
Salary Sacrifice Schemes: Employees can lease cars via their company, which reduces taxable income. This is a tax-efficient strategy to supply cars while keeping employee perks.
Company Car Leasing: Leasing cars instead of purchasing them might reduce capital investment. This might be an excellent choice for businesses wishing to preserve financial flexibility.

How to Reduce the Company Car Tax?

Both organizations and employees can take actions to reduce the tax burden on corporate cars:

Choose Low-Emission Cars: Reduced CO2 emissions result in reduced BIK rates. Electric and hybrid cars are preferred because they incur fewer tax responsibilities.
Opt for Electric or Hybrid Vehicles: Electric or hybrid vehicles are eligible for government subsidies and lower tax rates. Long-term fuel savings make these choices intriguing.
Limit personal use: If the car is only used for business purposes, tax liability is minimized. Clear use policies can aid employees in avoiding undue tax charges.
Negotiate a car allowance: This reduces the tax cost of a business car while providing transportation benefits. Employees have more influence over their car options.
Regularly Review Tax Bands: Regularly review tax bands to optimize car choices and save expenditures. Employers should review their corporate car policies to ensure compliance with tax requirements.