Tax and company vehicles
Clients often ask us about providing themselves or their employees with a company vehicle. It’s worth having a chat with us before visiting the car showroom
Company vehicles are considered as non-cash rewards or benefits in kind by HM Revenue and Customs (HMRC), and they are subject to different tax rules depending on the type and usage of the vehicle.
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Business owners, employers and employees who want to understand more about using a car which is not owned by them, but by the company they own or employed by.
Company cars
A company car is a vehicle that is suitable for private use, such as a car or a motorhome. It does not include vehicles that are built for transporting goods, such as lorries, vans and trucks. If you provide a company car to your employee, or if you use a company car yourself, you have to pay tax on the value of the car and the fuel you use.
Car benefit
The value of the car benefit is calculated by multiplying the list price of the car by a percentage based on its CO2 emissions. The higher the emissions, the higher the percentage.
Fuel benefit
The value of the fuel is calculated by multiplying the same percentage by a fixed amount, which is £27,800 for the 2023/24 tax year.
The employee can reduce the value of the fuel benefit if they reimburse the employer for some or all of the fuel costs or if they do not use the car for private journeys.
Capital allowances
As the employer, you can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax. The amount you can claim depends on when you bought the car and its CO2 emissions. For example:
New and unused cars with zero emissions or an electric car - 100% first year allowance.
New or second-hand cars with emissions over 50g/km - 6% of the value as a special rate allowance.
You can read more about the rates for cars on the HMRC website: HMRC capital allowances.
Electric vehicles
For the tax year 2023/24, the BIK rate for electric cars is only 2%, compared to up to 37% for petrol or diesel cars. For example, if you drive a Tesla Model 3 with a list price of £40,000, your annual BIK tax will be £800 (2% of £40,000). But if you drive a BMW 3 Series with a similar list price and CO2 emissions of 150g/km, your annual BIK tax will be £5,920 (37% of £40,000)².
The BIK rate for electric cars is set to increase gradually by 1% each year until 2027/28, when it will reach 5%.
Another tax benefit of electric cars is the exemption from the fuel benefit charge. This means that you can charge your electric company car at work or at home without any tax implications.
You can claim ‘enhanced capital allowances’ (a type of 100% first year allowance) for electric cars and cars with zero CO2 emissions.
Company vans and fuel
A company van is a commercial vehicle that is mainly used for transporting goods. It does not include cars or vehicles that can carry passengers. If you provide a company van and fuel to your employee, or if you use a company van and fuel yourself, you have to pay tax on the value of the van and the fuel, unless they are exempt.
The van's value is a fixed amount, which is £3,960 for the 2023/24 tax year.
The value of the fuel is also a fixed amount, which is £757 for the 2023/24 tax year.
You can reduce the value of the van and the fuel if you pay some or all of the costs to your employer, or if you have restricted private use of the van.
The requirements to be met in order for no van benefit in kind charge to apply are:
The van must only be available to the employee for business travel and commuting and must not be used for private purposes except to an “insignificant” extent.
The van must be available to the employee mainly for use for the employee’s business travel.
Capital allowances on vans
The amount you can claim depends on the type and usage of the van and when you bought it, but in most cases vans qualify as plant and 100% of the cost can be deducted from profit.
How to report and pay
As an employer, you must report the value of the company vehicles and fuel you provide to your employees on a P11D form at the end of the tax year. You also have to pay Class 1A National Insurance on the value of the benefits at 13.8%.
As an employee, you must pay income tax on the value of the company vehicles and fuel you receive as benefits. The amount of tax you pay depends on your income and tax rate.
Conclusion
Company vehicles and fuel are common benefits that employers provide to their employees, but they also come with tax implications. We recommend speaking to us if you are considering this. If you have a particular vehicle in mind, we can tell you the tax implications of owning it. We can also discuss alternatives.
By doing so, you can avoid any unwanted surprises or penalties from HMRC.