Company cars are a popular work benefit, but the way they’re taxed can be complex.

Various changes have also happened in recent years, making it often more tax-efficient to purchase an electric car than other fuel types.

As an employer, you’ll need to work out the tax due on cars you provide as a benefit and the amount you can claim when you purchase the vehicle.

Benefit-in-kind tax on company cars

If you purchase a car for your employees’ private use (or a combination of work and private use), it counts as a ‘benefit-in-kind’.

Benefits in kind are any non-cash benefit with monetary value that you give to employees. Both you and your employee will need to pay a tax charge on the value of that benefit.

This means you need to work out the taxable value of cars or fuel you provide for your employees’ private use and report this to HMRC.

This taxable value is affected by the type of fuel the car uses, its CO2 emissions and the amount of time it’s available to employees in a tax year.

HMRC provides a car and car fuel benefit calculator to estimate the amount of tax you and your employee need to pay in a tax year.

Capital allowances on company cars

Another important factor to think about is the tax relief you can receive when buying a company car.

Company cars can qualify for some tax relief when you purchase them to use in your business. You can use writing-down allowances to deduct a percentage of their value from your profits.

These are available to companies specifically, so if you’re a sole trader or partner and have bought a car to use in your business, you won’t be able to claim capital allowances. You can usually claim simplified mileage expenses on business vehicles instead.

The amount you can claim depends on when you bought the car and its CO2 emissions.

Tax on electric vehicles

In recent years, the tax charge on most types of company cars has increased, making it an expensive benefit to offer. But electric vehicles are the exception, with much more beneficial rates of tax.

For one thing, the benefit-in-kind rate on electric cars stands at just 2% and is set to remain at that level until April 2025.

By contrast, a car at the opposite end of the scale with emissions of more than 170g/km would be taxed at 37%.

Electric vehicles also qualify for first-year allowances when you purchase them, meaning you can deduct their full value from your profits before tax, compared to the smaller percentage you can deduct with other types of cars.

We can help

By buying an electric car for your company you can choose the greener option at the same time as saving your company and your employees’ money.

It’s important to plan your purchase well, though, and to understand the way tax applies to it.

We can help by explaining tax on company cars, as well as any other company benefit you offer.

Get in touch to find out more.