Business cars benefit companies in a number of ways. Not only are business cars an appealing perk to prospective employees, but they can also boost company morale and increase employee retention. Business cars also provide employees with greater flexibility, which is especially important for those with children.
Before creating a business car scheme, companies first need to research the various business car insurance options available to their employees as well as the taxes both parties will have to pay on the vehicle. This article will explain the taxes on business cars and the different insurance options that employers can choose from.
What Is a Business Car?
Before discussing the tax on business cars and the different insurance options on the market, it’s important to understand what exactly a business car is. By definition, a business car is “a vehicle used by a single employee that is leased or owned by their employer.” A business car can be driven for personal and business reasons, but the mileage must be recorded separately by the employee for tax and legal reasons.
Taxes for Business Cars
Employees who drive a business car are legally required to pay Benefit in Kind (BIK) tax. BIK tax is reserved for non-cash company benefits and perks, like business cars. The amount of BIK tax employees pay depends on the car’s value to them. The value of the business car is reduced if employees only have access to it part-time, they pay something towards its costs or it has low CO2 emissions.
Other factors that affect the amount of BIK tax employees will pay are:
- The age of the car
- Fuel type
- The engine size
- The list price of the car
- The employee’s income bracket
Something to note is that employers often reimburse employees for the cost of fuel for business miles driven. (The government releases new advisory fuel rates every quarter that determine how much employers should pay for fuel). In some cases, employers may choose to reimburse personal miles as well. In that case, the employee will still need to pay BIK tax on those reimbursed personal miles.
Read more: Guide to Claiming Back Business Miles
In addition to BIK tax, business cars are also subject to NIC payments by the employer. The exact NIC payments to be paid by the employer will depend on the vehicle’s value, BIK rate and an annual percentage determined by the UK government.
Business Car Insurance Options
Anyone who drives a vehicle for business needs business car insurance. Regular car insurance policies won’t cover drivers if they’re in an accident while driving for work. Business car insurance costs more than personal car insurance and is typically provided by the employer.
Here are the three main classes of business car insurance:
- Business car insurance class 1: Often the cheapest business car insurance option. This class of insurance covers employees who are driving between work locations, or to visit clients or customers.
- Business car insurance class 2: Slightly more expensive than class 1 insurance. This class of insurance gives the same coverage as class 1, but it allows employers to add a named driver. Additionally, a co-worker can also be insured to drive the same car.
- Business car insurance class 3: The most expensive insurance option. This class of insurance covers long-distance driving.
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Need Help Tracking Business Car Mileage?
Business cars are a great way to recruit and retain employees, boost company morale and provide employees with greater flexibility. However, business cars are subject to specific taxes and also require special insurance coverage. Tracking personal and business miles is a key factor in determining the amount of BIK tax to be paid on a business car.
Companies struggling to track the mileage of their business cars may benefit from installing GPS telematics systems into their vehicles. A GPS car tracker makes it easy to track mileage and digitally categorize each mile driven as being business or personal miles.