Company cars are a very popular benefit for companies to provide their staff. A company car will be seen as a ‘benefit-in-kind’ (BIK) and will therefore be taxable.

Over the years, the way company cars are taxed has changed, making it more of a challenge to provide the benefit in a cost-effective way.

There are ways you can still offer this perk to employees without it becoming a heavy burden. Here are some tax-efficient ways to provide a company car.

How taxing company cars works

Like all BIKs, a company car is seen as a non-cash benefit, so employees will have to pay tax if they use it for private and business purposes.

As an employer, you’ll also be liable to National Insurance contributions (NICs) based on the car’s value. This can be done by either working out the cash equivalent of the benefit and adding it to an employee’s salary, which is then taxed through payroll or using a P11D form.

P11D

When you provide an employee with a BIK, you’ll also have to complete a P11D form by 6 July following the end of the tax year. On the form, you’ll have to state the value of the benefit given to your employee.

With company cars, you’ll have to determine the P11D value, which is based on:

• the car’s list price (including VAT)
• delivery charges (minus the registration)
• the first year’s car tax.

P11D is used to calculate the annual car tax due for payment on business vehicles. The higher the value, the more tax will be due.

Tax-efficient ways to provide company cars

Although you’re very likely to pay tax on the benefits you provide for your employees, there are ways to lower the impact.

Firstly, you should consider employee capital contributions towards company cars. This allows an employee to contribute up to £5,000 towards the cost of the car. In doing so, this will lower the list price by the size of the contribution, reducing the amount of tax you’ll have to pay as a result.

When calculating tax on a company car, you’ll also need to consider:

• fuel type
• engine size
• emissions.

Because of these factors, many companies opt for electric vehicles.

Buying an electric car for your company allows you to deduct 100% of the cost through capital allowances. This means you can claim tax relief on the full value of the vehicle within the first year of purchase.

As electric cars don’t use ‘fuel’, you won’t need to pay Class 1A NICs on your employees’ vehicles as you would when providing petrol or diesel-powered vehicles.

Also, as of December 2022, HMRC has started using a new method to calculate advisory electric rates (AER), the equivalent of advisory fuel rates (AFR) for electric vehicles. HMRC now calculates AER quarterly using Office for National Statistics (ONS) energy figures and electrical energy consumption values for each vehicle model.

Due to rising energy and fuel costs, it is generally more beneficial to provide greener alternatives, even with the increase of mileage allowance to 8p per mile for electric vehicles.

Looking for advice?

With all of the varying tax implications, it can be difficult to settle on the most efficient way to offer your employees BIK.

We work closely with business owners to find the best ways to provide those extra perks for their staff, so we’d be happy to discuss your options.

Get in touch to talk about benefits-in-kind.