Is a Company Car the Right Choice for You? Understanding Tax Efficiency

A company car can be a valuable perk, especially if your job requires a lot of travelling. However, deciding whether a company car is the best option for you requires careful consideration, particularly when it comes to tax efficiency. In this post, we’ll guide you through the tax implications of owning or leasing a company car and help you determine if it’s the most tax-efficient option for your situation.

What is a Company Car?

A company car is a vehicle provided by your employer for both business and personal use. It’s a popular employee benefit, but it comes with tax implications depending on how it's used. The tax treatment of a company car varies based on your employment status and the car’s CO2 emissions.

Employment Status and Tax Implications

Employees

For employees, a company car used for personal purposes is considered a Benefit-in-Kind (BIK). The taxable value of the car is based on its list price, CO2 emissions, and fuel type. This benefit is reported on a P11D form, and you’ll pay income tax and National Insurance Contributions (NICs) on it.

Sole Traders

Sole traders can claim mileage allowances if they use their personal car for business purposes. The current mileage rate is 45p per mile for the first 10,000 miles and 25p thereafter. If the car is owned by the business, you can claim capital allowances and deduct business-related expenses, but adjustments must be made for any private use.

Directors of Limited Companies

Directors are taxed similarly to employees. The company car is treated as a BIK, and the tax payable depends on the car's CO2 emissions. BIK rates range from 2% to 37%, with lower rates applying to low-emission and electric vehicles.

Buying vs. Leasing a Company Car

Buying a Car

When buying a car through your company, you can claim capital allowances on the cost of the vehicle. The amount depends on the car’s CO2 emissions:

• 100% First-Year Allowance: For new, electric, or zero-emission cars.
• 18% Writing-Down Allowance: For cars with CO2 emissions up to 50g/km.
• 6% Special Rate Allowance: For cars with CO2 emissions over 50g/km.

Leasing a Car

If your company leases the car, the lease payments can be deducted as operating expenses. For cars emitting over 110g/km of CO2, 15% of the lease payments are non-deductible. VAT can be reclaimed for business use, but only 50% if the car is used for both personal and business purposes.

Tax Treatment of Different Vehicles

Cars

The BIK rates for cars are determined by CO2 emissions. For 2023-24, cars emitting up to 50g/km have BIK rates ranging from 2% to 14%, while cars emitting over 170g/km are taxed at 37%.

Vans

Vans are generally more tax-efficient than cars. For the 2023-24 tax year, the BIK rate for vans is a flat £3,960. However, if the van is used solely for business purposes, there is no taxable benefit.

Electric Vehicles: The Tax-Efficient Choice

Electric vehicles (EVs) offer significant tax benefits:

• BIK Rates: EVs attract the lowest BIK rates, starting at 2% for 2023-24.
• Enhanced Capital Allowances: You can claim 100% first-year allowances on zero-emission vehicles.
• Other Benefits: Exemptions from congestion charges and reduced road tax.

These benefits make electric vehicles a highly attractive option for tax efficiency.

Fuel Benefit Tax

If your company provides fuel for personal use, you will incur an additional fuel benefit tax. The amount is calculated based on the fuel benefit multiplier (£27,800 for 2023-24) and the car’s CO2 emissions.

Company Car Allowance

An alternative to a company car is receiving a car allowance from your employer. This is a cash sum that allows you to use your own vehicle. While the allowance is taxable income, it can offer more flexibility and may be more tax-efficient depending on your situation.

Conclusion

Choosing between a company car and a car allowance requires careful consideration of your tax liabilities, vehicle type, and whether you plan to buy or lease. Electric vehicles offer substantial tax savings, and leasing can be a more cost-effective option for many businesses. Ultimately, the decision should be based on your specific needs and the tax implications for your business.

How Baines Watson Accountants Can Help

At Baines Watson Accountants, we specialize in providing expert advice on company car tax and other tax-efficient strategies for businesses. Whether you’re considering purchasing an electric vehicle, need help understanding Benefit-in-Kind rules, or are looking to maximize capital allowances, our dedicated team is here to help.

We work closely with small and medium-sized businesses to ensure they make informed decisions that align with their financial goals. Contact Baines Watson Accountants today for tailored guidance on making the best choice for your company car and optimizing your tax efficiency.

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