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How are company cars taxed?

If you decide to buy a company car, and use it for personal as well as business reasons, then you will be liable for a tax charge for the privilege. The amount of the benefit in kind depends on a number of factors.

Company Car Taxation

The cost of company car ownership for employees

The amount employees pay (typically via the company payroll) as a ‘benefit in kind’ depends on a number of factors, including:

  • The car’s list price, including the value of any accessories.
  • How polluting the car is (according to its CO2 emissions).
  • What type of fuel the car uses.
  • If the employee has made an upfront ‘capital contribution’ for the car.
  • If the employee makes regular payments for the private use of the car.
  • Was the car available for the employee for the whole, or part of the tax year in question?

How to calculate how much benefit in kind you will be liable to pay, you can use the Company Car & Car Fuel Benefit Calculator here.

The car tax charge is typically between 15% and 35%, depending on the car’s CO2 emissions, and the fuel charge (the same percentage as the car tax charge) depends on the efficiency of the engine, not the quantity of fuel provided.

If you are provided with use of a company car for purely business trips, then there is no benefit in kind tax charge.

Company pool cars (which are used by multiple employees but not kept overnight at a residential address) are also exempt.

The cost of company car ownership for the employer

As well as the personal tax you have to pay for company car use, the employer will also be liable to pay Class 1A National Insurance Contributions on the amount of taxable benefits provided to employees.

Buy a company car or use your own vehicle?

Whether or not you are better off using a company car, or using your own vehicle and reclaiming mileage, depends on a number of factors listed above.

For IT contractors and other small limited companies, you are often better off using a private vehicle and claiming back your mileage costs, due to the high levels of taxation on both employer and employee on company car ownership.

As an employee, you will pay a benefit in kind charge for using the car, and your own company will have to pay NICs on the same amount.

However, if your vehicle has particularly high expenses (such as insurance, repairs, servicing, road tax), the value of these additional benefits may outweigh the extra tax you will pay.

You should definitely talk to your accountant who can calculate how much each option will cost you.

Further Information

Hiscox Business Insurance
Pay with monthly direct debits
Qdos Tax Enquiry Insurance
Cover just £99/year