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.
