Company cars: tax implications for businesses & employees

Company cars remain a popular benefit for many UK businesses, but it’s crucial to understand the tax implications for both the company and the employee. This article will explore these implications, with a particular focus on the tax advantages of electric vehicles (EVs).

Company tax implications 

When a company provides a car to an employee, it can deduct the cost of the car from its taxable profits. This includes expenses such as fuel, maintenance, and insurance. However, the tax treatment varies depending on the car’s CO2 emissions:

1. For cars with CO2 emissions of 50g/km or less (including most EVs), companies can claim 100% first-year allowances. This means the full cost can be deducted from profits before tax in the year of purchase.

2. For cars with CO2 emissions between 51g/km and 110g/km, companies can claim 18% writing down allowance per year.

3. For cars with CO2 emissions above 110g/km, only 6% writing down allowance per year can be claimed.

Personal tax implications

Employees who receive a company car are subject to Benefit in Kind (BiK) tax. The amount of tax depends on the car’s value and its CO2 emissions. Until 2025:

1. For EVs with zero emissions, the BiK rate is just 2% of the car’s list price.
2. For petrol and diesel cars, BiK rates range from 5% to 37%, depending on CO2 emissions.

The employee pays income tax on this benefit at their marginal rate. For example, a basic rate taxpayer with an EV worth £30,000 would pay just £120 in BiK tax for the year (£30,000 x 2% x 20%).

Focus on electric vehicles

The UK government has introduced significant incentives to encourage the adoption of EVs:

1. Low BiK rates: as mentioned, EVs have a BiK rate of just 2%, significantly lower than petrol or diesel alternatives.
2. First-year allowances: companies can deduct the full cost of an EV from their taxable profits in the year of purchase.
3. Charging equipment: businesses can claim 100% first-year allowances on EV charging points installed at their premises.
4. Zero road tax: EVs are currently exempt from Vehicle Excise Duty (road tax).
5. Fuel benefit charge: if the company pays for electricity to charge an employee’s EV, including for private use, there’s currently no fuel benefit charge. This contrasts with petrol and diesel cars, where fuel for private use is taxed.

These incentives make EVs an attractive option for both companies and employees. A business can reduce its corporation tax bill while providing a valuable benefit to employees at a lower tax cost.

While company cars can be a valuable benefit, it’s essential to consider the tax implications carefully. Electric vehicles offer significant tax advantages for both businesses and employees, aligning financial benefits with environmental responsibility. As always, we recommend consulting with a qualified accountant to understand how these rules apply to your specific situation.

Speak to the team at Ellis & Co team today to find out more about how your business could benefit.