Company car benefits are a common perk for employees and directors in the UK, providing access to a vehicle for both business and personal use. While these schemes offer financial advantages and convenience, they also come with tax implications that need to be carefully considered. Understanding how company cars are taxed and what options are available can help employees and directors make informed decisions.
What Are Company Car Benefits?
Company car benefits refer to vehicles provided by employers for business and sometimes personal use. In the UK, many employers offer company cars as part of a benefits package to attract and retain employees. These cars are typically leased or purchased by the company, with the employer covering maintenance, insurance, and other associated costs.
Company cars remain a popular benefit for employees and directors due to their financial advantages, convenience, and potential tax efficiencies. Employees save on personal vehicle expenses, while directors can use company resources for transportation needs, reducing personal financial burdens.
Key Company Car Benefits for Employees
Company car schemes offer a range of valuable perks for employees, making daily travel simpler and more affordable. Here are a few key benefits:
Financial Savings – Employees avoid expenses related to purchasing a vehicle, insurance, servicing, and maintenance, as these are covered by the employer.
Predictable Costs – The employer bears unexpected costs, such as repairs, ensuring employees have fixed, predictable transportation expenses.
Fuel and RunningAccess to Newer Vehicles – Employees often get access to newer, safer, and more fuel-efficient models, which enhance comfort and security.
Cost Support – Some employers cover fuel costs or provide reimbursements for business-related travel, reducing employees’ out-of-pocket expenses.
Professional Benefits – A company car can enhance an employee’s image, particularly for roles that require frequent client visits.
Key Company Car Benefits for Directors
Company car schemes also bring strong advantages for directors, offering more than just a comfortable ride. Here are a few key benefits:
Tax Efficiency – Directors can benefit from tax-efficient ways to finance company vehicles, particularly if they choose electric or low-emission cars.
Reduced Personal Liability – The company assumes vehicle-related responsibilities, removing personal financial risks associated with depreciation and repairs.
Convenience – Directors do not need to worry about sourcing or maintaining a car, as the company handles all associated arrangements.
Director’s Image – Having a high-end company car can reflect professionalism and credibility when meeting clients or business partners.
No Depreciation Worries – Since the car is owned or leased by the company, directors do not suffer personal financial losses due to vehicle depreciation.
How Company Car Benefits Are Taxed
Company cars are considered a Benefit-in-Kind (BiK), meaning employees and directors are taxed based on the car’s P11D value, CO2 emissions, and their income tax bracket. The tax you pay depends on the car’s list price, fuel type, and whether it’s used for business or personal journeys, including commuting. If the car is shared part-time or you contribute to its cost, the taxable value may be reduced. Low-emission and hybrid company cars (1 to 50g/km CO2) are taxed based on their electric range, which is how far the car can travel on electric power alone. If your employer pays for fuel used during personal travel, that is taxed separately.
How Benefit-in-Kind (BiK) Tax Works
Benefit-in-Kind tax is calculated using the following factors:
- P11D Value – The car’s official list price, including VAT and optional extras, but excluding the first-year registration fee and road tax.
- CO2 Emissions – Vehicles with lower emissions attract lower BiK rates.
- Income Tax Bracket – Higher earners pay more BiK tax as it is based on their tax band (20%, 40%, or 45%).
Employers also pay Class 1A National Insurance on company cars based on the BiK value.
How You Can Reduce Company Car Tax Liabilities
There are several strategies to minimize tax liability on company cars:
- Choose Low-Emission Vehicles: Opting for electric or low CO2 emission vehicles can significantly lower your BIK rate.
- Salary Sacrifice Schemes: Some employers offer salary sacrifice arrangements, allowing employees to pay for their car through pre-tax earnings, reducing their taxable income and National Insurance contributions.
- Employee Car Ownership Schemes (ECOS): Unlike traditional company car schemes, ECOS allows employees to own the vehicle, avoiding BiK tax while still benefiting from employer support.
- Reimburse Fuel Costs: Employees who receive employer-paid fuel for personal use can avoid additional tax by reimbursing the employer at HMRC’s Advisory Fuel Rates.
Company Car vs. Car Allowance: Which Is the Better Option?
Choosing between a company car and a car allowance depends on several factors, including your vehicle usage, tax implications, and personal preferences. Here are the key differences:
Company Car
- Provision: With a company car, your employer provides a vehicle for both business and personal use, covering expenses such as maintenance, insurance, and depreciation.
- Tax Implications: The company car is considered a taxable benefit, known as “Benefit in Kind” (BIK). Your tax liability depends on the car’s list price, CO2 emissions, and other specifications. Generally, the higher the car’s emissions, the higher the tax.
- Fuel Benefit: If your employer covers fuel costs for private use, this is an additional taxable benefit. The value is determined separately and reported to HM Revenue and Customs (HMRC).
Car Allowance
- Provision: A car allowance is a fixed cash amount your employer provides, allowing you to buy or lease your own vehicle.
- Tax Implications: Unlike a company car, a car allowance is treated as additional salary, which is subject to Income Tax and National Insurance contributions.
- Mileage Claims: If you use your personal car for business, you may be eligible for mileage claims, which offer tax relief based on approved rates to cover fuel and maintenance costs.
Key Considerations
- Usage: A company car may be more beneficial if you frequently drive for work, as it provides convenience and predictable costs. Conversely, a car allowance offers flexibility and may be advantageous if you already own a suitable vehicle or prefer a personal choice.
- Tax Efficiency: Electric and low-emission vehicles often benefit from lower BIK tax rates, making them more tax-efficient options for those considering a company car. This can be a cost-effective decision for environmentally conscious employees.
Before making a decision, weigh your vehicle usage, tax obligations, and personal preferences. Whether a company car or a car allowance is the better option ultimately depends on which best suits your needs.
How to Choose the Right Company Car
When selecting a company car, it’s important to consider both business and personal needs to ensure the vehicle fits your lifestyle and job requirements. A well-chosen company car can offer financial benefits while aligning with your daily tasks. Here are key factors to consider when choosing the right company car:
- Assess Business and Personal Needs – Consider the car’s usage, size, and features required for both work and daily life.
- Evaluate CO2 Emissions – Opt for low-emission or electric vehicles to reduce tax liabilities and running costs.
- Compare Running Costs – Factor in insurance, fuel efficiency, and potential tax implications.
- Review Employer Policies – Ensure the vehicle aligns with company policies and any restrictions on model types or budgets.
Best Company Cars for Low BiK Rates in 2025-2026
Some of the best company cars for low BiK tax rates include:
- Tesla Model 3: The BiK rate increases from 2% to 3% in 2025-2026. It remains a tax-efficient option due to its fully electric nature.
- Hyundai Ioniq 5: Also transitioning from a 2% BiK rate to 3%. It continues to be an efficient electric vehicle choice.
- BMW i4: Similarly, it will move from a 2% BiK rate to 3%. It offers a premium electric sedan experience.
- Toyota Prius Plug-in Hybrid: While not fully electric, it benefits from low CO2 emissions. However, its BiK rate depends on its electric range and emissions. For plug-in hybrids with emissions between 1-50g/km and an electric range of 130+ miles, the BiK rate will be 3% or higher based on specific emissions and range criteria.
Choosing an electric or hybrid vehicle can provide long-term financial savings through lower taxation and running costs.
Company cars offer valuable benefits, but it’s important to understand the tax implications and your options. Whether you choose a company car or a car allowance, careful planning can help you minimize taxes and make the most of your choice. Take the time to assess your needs and make an informed decision that works best for you.
Frequently Asked Questions
Can directors claim mileage expenses with a company car?
Yes, directors can claim mileage expenses for business-related travel. However, commuting to and from work is not considered business mileage and is subject to tax.
How is the Benefit-in-Kind (BiK) tax calculated for company cars?
BiK tax is based on the car’s P11D value, CO2 emissions, and the employee’s income tax band. The percentage rate is determined by emissions and vehicle type
How can I reduce the tax impact of having a company car?
Opting for a low-emission vehicle, participating in salary sacrifice schemes, and reimbursing personal fuel costs can lower tax liabilities.
Are there any recent changes to taxes affecting company cars?
Yes, for the 2025-26 tax year, BIK tax rates for electric vehicles will be 3%. Plug-in hybrid rates vary based on electric range.
Are electric company cars subject to the same taxes as petrol or diesel cars?
No, electric vehicles have lower BiK rates (currently 2%) compared to petrol and diesel cars, making them a more tax-efficient option for company car schemes.
