A company car is:
- A vehicle used by a single employee
- Leased or owned by their employer
- Driven for personal and businesses reasons
This is not to be confused with a pool car – a vehicle driven by various employees for business reasons only.
When a company car is used for personal reasons the mileage of personal and business usage must be recorded separately (by the driver), for tax and legal reasons – see HMRC company car tax explained for more information. Generally, the maintenance and business-related fuel expenses are paid for by the company. This makes company cars an attractive company benefit.
Get a Beginners Guide to Company Car Taxes:
Advantages Of Company Cars
From a business perspective there are numerous reasons for offering cars to employees:
- Recruitment: Company cars are an appealing perk, and may be a factor in deciding which employer to work for.
- Convenience: Access to a company car allows employees greater flexibility. This can be especially helpful to those with children. A company car can ease the commute between the office and out-of-office business appointments.
- Sustainability: By providing low-emission vehicles, employees can reduce their carbon footprint. Additionally this can help save money on fuel.
- Reputation: Company cars as benefits can give a boost to staff morale and the image of the employer.
- Economics: Providing a company car as part of a ‘salary sacrifice scheme’ can reduce employers’ NIC (National Insurance Contribution) obligations.
Company Cars v.s. Pool Cars
It is important to understand the differences between pool cars and company cars.
A pool car is a vehicle bought or leased by an organisation for the use of multiple employees. A pool car should not be used for significant private activity. It is important to note this distinction since both types of vehicles have their own unique set of tax and regulatory obligations.
Company cars are private vehicles for staff to take home. This gives drivers greater flexibility on how they use the vehicle. Pool cars are to be kept on-site and made available to employees when they need them. In other words, vehicles labeled as ‘pool cars’ should not be kept at an employee’s house for an extended period of time.
This distinction is significant when regarding taxes. Pool cars are strictly for business use and are not a corporate benefit. Therefore, they incur less cost through NIC and no cost through BIK tax.
In fraudulent cases, businesses class their company cars as pool cars, to avoid paying more tax. It’s important not to make this mistake. HMRC regularly levies fines for incorrectly designated vehicles. These fines can amount to £3,000 per vehicle per year – plus extra penalties for ‘potential lost revenue’ to HMRC.
Read more: company car allowance tax
HMRC Company Car Tax
Employees with a company car are required to pay a Benefit In Kind (BIK) tax. This tax is reserved for non-cash company benefits and perks. BIK tax rates are based on:
- The age of the car
- Fuel type
- CO2 emissions
- The engine size
- The list price of the car
- The employee’s income bracket
Get a Beginners Guide to Company Car Taxes:
Company car tax and your business
Company cars are also subject to NIC payments by the business. However, the NIC on company cars can be less than the NIC required on a comparable salary payment. Additionally, employers can claim the VAT on fuel as a business expense and the cost of the car itself can be offset as a capital allowance.
Another important aspect of taxation and company vehicles is fuel. Most employers reimburse the employee for any fuel used during business miles. Every quarter the government releases guidelines on how much companies should pay for fuel. These guidelines are broken down by business miles driven, the car’s engine size and the type of fuel used.
If a company wishes to reimburse fuel expenses for personal trips as well they are free to do so. That said, the employee will still need to pay BIK taxes on reimbursed personal miles.
Unfortunately there are issues of fraudulence when it comes to company car taxes. Sometimes employees will claim personal miles as business miles to avoid paying BIK taxes. If an employee with a company car does make such false mileage claims they will undergo serious HM Revenue and Customs penalties. Even if the difference is only a few miles.
Understanding and staying on top of the HMRC company tax rate is essential for anyone utilizing a company car. Remember, your company car tax rates tend to change annually, and particular aspects such as your income, the car’s value, and emissions rate affect how much HMRC company tax you’ll need to pay.
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How do you calculate HMRC company car tax?
There are several factors to consider when calculating the HMRC company car tax. These include:
- The P11D value
- Your annual income tax rate, i.e., 20% or 40% or 45%
- Your car’s fuel
- CO2 emissions
The most straightforward way of working out the HMRC company tax is through the HMRC company car calculator. Take note of the following when filling out the calculator.
- Under the fuel type section, answer “F” if you are using a diesel car that is at par with the Euro 6d standard; otherwise, select “D” for standard diesel cars and “A” for other vehicle options.
- Select ‘no’ when answering ‘is the car provided via an optional remuneration arrangement?’ if your company car is electric or has a certified emissions rate of 75g/km and below.
- Indicate “zero-emission mileage ” if your company car’s emission rate is 50g/km or less. You can get this figure from a fleet company if the car’s on lease.
Read More: Company Car Tax Bands
HMRC company car tax rates vs vehicle type
There are two ways in which the vehcile can affect your HMRC company car tax rate. The first one being the emissions figure. Low-emitting company cars will attract lower tax rates than their high-emitting counterparts.
- For instance, for FY 21/22, any car that emits 170g/km and above will fall under the upper 37% tax band. Therefore if your company car is a Land Rover or a large SUV like the Alfa Romeo, be prepared to cough up a hefty amount.
Secondly, your company car’s registration also affects your HMRC company tax rate. The reason for this is the 2019 treasury announcement on splitting the BiK rates in two; one for vehicles registered before 6th April 2020 and the other for those registered after this date.
As a result, the HMRC company car tax rate for some cars would be informed by the NEDC (New European Drive Cycle), while others would use the WLTP (Worldwide Harmonised Light Vehicle Test Procedure) criteria.
How can you pay less HMRC company car tax?
The short answer would be to switch to an electric company car. In 2020, the tax amendments saw the HMRC company tax rate drop from a whopping 16% to 0%. The rate has, however, increased for FY 21/22 to 1%. This incentive has played a role in the increased uptake of electric vehicles.
Alternatively, you may opt for a plug-in hybrid vehicle mainly if you use the company car for long distances, making routine charging a challenge. In addition, such vehicles fall under the 2% to 14% HMRC company car tax rates if they emit 50g/km or less.
Which vehicles are exempt from HMRC company car tax?
The HMRC company car tax rates apply to a vehicle or fuel offered under the salary sacrifice agreement. Your company car may be exempt if it falls under the following categories.
- Your vehicle is privately owned.
- You are exempt from the HMRC company car tax if your company car is only available for running business errands.
- Your company car is exempt if a worker with a disability uses it for these reasons: travel between home and the office or uses the vehicle to attend business-related training.
- There’s no need to report your company car if your employees pay for the fuel regardless of the nature of travel.
- Business vehicles are exempt from HMRC company car tax if it is a ‘pool’ vehicle.
Staying updated on your HMRC company car tax payments is crucial. Learn more about HMRC company car tax & regulations by visiting our tax hub today.
3 Important Regulations For Company Cars And The HMRC
Both company vehicles, and the businesses that offer them, are subject to important regulations:
1. Check driver competence
Employers must ensure that all drivers of company vehicles have a valid licence. This usually includes a ‘declaration’ signed by drivers, attesting they are qualified to drive the vehicle in question. The company should also provide handbooks setting out procedures for maintenance, usage, and ‘fair wear and tear’ to the vehicle.
2. Age-related issues
If the driver of a company vehicle is under the age of 25, additional rules apply. Employers should request proof of age and include a clear statement of the relationship between the staff member and the company.
3. Data protection
If a company uses a fleet management software that employs a car tracking system, these trackers must follow GDPR data regulations. In most cases, trackers are not allowed in company cars, only in pool vehicles. This is to protect the privacy of the driver.
Get A Free Company Car Policy Template
The Right Cars For Your Business
Company cars are a popular employee benefit. They enable staff to meet clients, attend key events, and reach their workplace with ease. In some cases, they can even be tax efficient.
It is important to correctly structure company vehicle schemes. This helps limit tax liabilities and provide a scope to track metrics like staff performance and fuel consumption. With Vehicle Excise Duty (an annual vehicle tax), UK businesses can keep tax incursions low by investing in low emission and electric/hybrid company cars.
It is vital for businesses to think about how their fleet affects this business. This includes accurately documenting their vehicles. Government regulations change and tax authorities are vigilant. Finding ways to record, store and analyse vehicle data is increasingly important for the future your business.
Read more: How To Create a Good Company Car Policy
6 Reasons For Getting A Company Car
1. It is economical for the employer
If an employer provides a company car as part of a salary sacrifice scheme, it will reduce the employer’s obligation to National Insurance Contribution.
2. Improve company reputation and production
A company car will provide an employer with a good look and also boost the employee’s morale. Because the employee feels appreciated, his work may improve due to the satisfaction of his needs.
3. Help in attracting new recruits
Company cars are appealing and can attract potential employees who are attracted to them.
A company car can help employee flexibility while commuting from one destination to another, unlike when communing through other means that are time-consuming and rigid. Having a company fleet is costly, especially in times of high inflation and increased fuel cost. There are, however, ways to keep company vehicles running and worthwhile. Leasing a vehicle from a registered company instead of buying one You will claim back 50% of your monthly Value Added Tax if you rent a vehicle to replace an off-road vehicle, and if you hire for less than ten days, you can claim 100%. Although this option has some exemptions.
5. Saving on Insurance
Insurance will take a considerable part of your fleet expenses. But if the business vehicle is partly used for private purposes, these costs can be shared. In addition, applying for fleet insurance will allow many business cars to be under one cover, and it gives discounts to businesses for buying policy cover in bulk.
6. Fuel cards for your fleet
With many companies offering national networks, fuel cards are a convenient way of paying for your fuel on the road. They also keep an accurate record of your fueling expense which can be helpful to companies trying to control the costs and avoiding overspending. Also, track their expenditure behaviour over a certain period.
Read More: The Total Fuel Card Guide
How Can Businesses Save Money With Company Cars?
A company car is a vehicle owned or leased by a business that a single employee uses. But are they worth buying for that single employee?
Many people mistake this with a pool car, which is the vehicle that various employees use. Company cars can help a firm save a lot of money, especially if it involves travelling long distances more than once a week.
A company car is in a way, a marketing tool, and can save advertising if well branded. Having a company logo brand at the side of the vehicle acts as an effective promotional tool. It is, however, good to know that by using fleet management software, you can improve the effectiveness and efficiency of your company vehicles. With good management software, you can monitor real-time delivery requests while your drivers can see their current destination and receive communication alerts. Of the best fleet management software is Vimcar.