Understanding Car Benefits in the UK

Providing company cars can be a strategic move to attract and retain top talent. In the UK, company cars are subject to specific tax rules that both employers and employees must consider.

What is a Company Car Benefit?

A company car benefit arises when an employer provides an employee with a vehicle for personal use. This is taxable. The tax is calculated based on several factors:

1. Car’s CO2 Emissions: Lower emissions mean a lower tax rate.

2. Car’s List Price (P11D Value): Includes the vehicle’s price and optional extras.

3. Fuel Type: Electric or hybrid cars attract lower tax rates compared to petrol or diesel vehicles.

4. Employee’s Income Tax Band: Higher earners pay more tax on the benefit.

Example of a Company Car Benefit-

Let’s consider an example:

• Car Provided: Ford Focus (Petrol, CO2 emissions: 110g/km)

• P11D Value: £25,000

• BIK Rate: 27% (based on CO2 emissions for 2024-2025)

• Employee’s Tax Band: 20%

Tax Calculation:

1. BIK Value = £25,000 × 27% = £6,750

2. Tax Payable = £6,750 × 20% = £1,350 per year (£112.50 per month)

For the employer, the Class 1A National Insurance contribution is calculated at 13.8% of the BIK value:

• £6,750 × 13.8% = £931.50 annually.

Advantages for Employers

1. Employee Retention: Offering a company car can enhance employee satisfaction.

2. Tax Deductions: Employers can claim back VAT and benefit from capital allowances on certain vehicles.

Advantages for Employees

1. Cost Savings: Employees avoid the upfront cost of purchasing a vehicle and maintenance expenses.

2. Convenience: The employer manages insurance, road tax, and servicing.

The Benefits of Electric Cars for Employers and Employees:

From the Employer’s Perspective:

1. Reduced Costs: EVs attract lower Class 1A National Insurance contributions due to their low BIK rates.

2. Enhanced Sustainability: Investing in EVs aligns with corporate social responsibility goals.

3. Incentives for Businesses: Employers can claim:

o 100% first-year capital allowances on EVs.

o Plug-in grants of up to £5,000 (if eligible).

4. VAT Reclaim: If the EV is used exclusively for business purposes, employers can reclaim the VAT on purchase and maintenance.

From the Employee’s Perspective:

1. Lower Tax Bills:

For the tax year 2024-2025, the BIK rate for EVs is only 3%.

Example:

o Car Provided: Tesla Model 3 (P11D Value: £42,000)

o BIK Rate: 3%

o Tax Calculation: £42,000 × 3% × 20% = £252/year (£21/month).

2. Cost Efficiency: Employees save on fuel costs, as electricity is cheaper than petrol or diesel.

3. Government Grants: Employees may benefit from home charging grants, reducing installation costs.

Conclusion:

Electric cars provides significant financial and environmental advantages for both employers and employees. By understanding the tax implications and choosing the right vehicle, businesses can offer a valuable perk while maintaining financial efficiency.

If you’d like further advice on selecting the most tax-efficient vehicle for your business or employees, contact S & B Accountants Ltd today.