Why a company car is a benefit in kind
When your company owns or leases a car and it is available for your private use, including ordinary commuting, you receive a benefit in kind. That benefit is treated as a kind of income and taxed accordingly, with the company also paying employer National Insurance on it. The charge applies because the car is available for private use, so simply choosing not to drive it much does not remove the benefit.
The taxable benefit is reported each year, and because it is a perk of being a director or employee it sits alongside your salary when working out your tax position. If you draw most of your income through a mix of salary and dividends, a company car adds a layer of taxable benefit on top, which is why it pays to understand the figures before you commit.
How the benefit is worked out
The taxable benefit on a company car is based on the car's list price multiplied by a percentage set by its carbon dioxide emissions. So two things drive the charge. The more expensive the car, the higher the list price it is based on, and the dirtier the car, the higher the percentage applied.
This is why a high emission petrol or diesel car can produce a large benefit even before you start driving it, while a low emission car produces a much smaller one. You then pay income tax on that benefit at your marginal rate, and the company pays employer National Insurance on the same figure.
The list price used is broadly the manufacturer's price when new, including most options, rather than what your company actually paid, so a discount at purchase does not reduce the benefit. Understanding how this feeds into your overall pay is part of sensible tax planning rather than a decision to make on a showroom forecourt.
Electric versus petrol and diesel
The emissions based percentage is where electric cars pull dramatically ahead. Because a fully electric car has no tailpipe carbon dioxide emissions, the percentage applied to its list price is currently very low, although it is rising gradually each year. The result is that a company electric car often produces only a small taxable benefit relative to its cost.
Petrol and diesel cars are a different story. Their percentages are much higher, so the benefit in kind is far larger for a car of similar value. This single difference flips the usual advice. For many owner managed companies a petrol or diesel company car is poor value once the benefit in kind is taken into account, whereas a fully electric company car can genuinely make sense.
Plug in hybrids sit somewhere in between, with the percentage depending on emissions and electric range, so they need looking at case by case rather than assumed to be a halfway house.
The fuel benefit
There can also be a separate fuel benefit if the company pays for the private fuel of a petrol or diesel company car. This is a fixed charge that is often poor value, because unless you do very high private mileage the tax on the fuel benefit can easily exceed the cost of the fuel itself. Many directors who have a company car choose to pay for their own private fuel to avoid this charge.
For fully electric cars the position around charging is more favourable, but the detail depends on where and how the car is charged, so it is worth checking rather than assuming.
The mileage alternative
For many owner managed companies, the cheaper route is to keep the car personal and claim business mileage from the company instead. You own the car yourself and claim an approved mileage rate for genuine business journeys, currently 45p a mile for the first 10,000 business miles in the year and 25p a mile after that for cars.
These payments are tax free in your hands when paid at the approved rates, and the company gets relief on them, with no benefit in kind to worry about. The mileage rate is meant to cover fuel, wear and tear, insurance and running costs, so it works best where you do a reasonable amount of business mileage in a car you would own anyway. For many petrol and diesel drivers this beats a company car comfortably. The big exception is fully electric cars, where the low benefit in kind often makes the company car the better choice.
A worked example
Tom compares a company car with mileage
Tom is the director of a consultancy and drives around 8,000 business miles a year. He is choosing between a diesel company car and keeping a car personal while claiming mileage.
With the diesel as a company car, the benefit in kind is the list price multiplied by a relatively high emissions percentage, and Tom pays income tax on that benefit every year while the company pays employer National Insurance on it too. Add a possible fuel benefit and the annual cost mounts up regardless of how the car is used.
If instead Tom keeps the car personal, he claims 45p a mile for his 8,000 business miles, which is GBP 3,600 paid to him tax free, with the company getting relief on the payment and no benefit in kind arising. For a diesel, this mileage route leaves Tom better off. If Tom were instead considering a fully electric car, the very low benefit in kind could tip the balance back towards taking it as a company car.
The right answer depends on the car, the list price, the emissions, your mileage and your tax rate, so treat this as an illustration. The pattern, though, holds for many small companies. Mileage often wins for petrol and diesel, while electric often wins as a company car.
Common mistakes
Directors regularly lose out by getting the company car decision wrong.
- Putting a petrol or diesel car through the company without doing the sums. The benefit in kind can cost more than the convenience is worth.
- Accepting the fuel benefit. Unless private mileage is very high, paying for your own private fuel is usually cheaper.
- Thinking a purchase discount reduces the benefit. The charge is based on the list price, not what the company paid.
- Forgetting to report the benefit and pay the employer National Insurance. This needs handling correctly, which ties into your payroll and year end reporting.
What you should do
Before choosing a company car, work out the annual benefit in kind for the specific car, including the list price and the emissions percentage, and compare it against simply claiming mileage on a personal car. For petrol and diesel, the mileage route often comes out ahead. For a fully electric car, the low benefit in kind frequently makes the company car the better option, especially when charging costs are considered.
If you do take a company car, decline the fuel benefit unless your private mileage genuinely justifies it, and make sure the benefit is reported properly. Getting this decision right sits naturally alongside deciding how directors pay themselves. If you would like us to run the comparison for your situation, start your quote.
A company car available for private use is a benefit in kind taxed on the list price and emissions, and for many owner managed companies claiming mileage is cheaper, except often for fully electric cars.
Frequently asked questions
Is a company car always a bad idea?
No. For petrol and diesel cars the benefit in kind is often high enough that claiming mileage on a personal car is cheaper. For fully electric cars the benefit in kind is currently very low, which often makes a company car the more tax efficient choice. It depends on the car and your mileage.
How is the company car benefit calculated?
The taxable benefit is the car's list price multiplied by a percentage set by its carbon dioxide emissions. You pay income tax on that benefit at your marginal rate and the company pays employer National Insurance on it. The list price is broadly the price when new, not what the company paid.
Why are electric company cars taxed so little?
Because the benefit in kind percentage is based on emissions, and a fully electric car has no tailpipe carbon dioxide emissions, the percentage applied is currently very low. It is rising gradually each year, but it remains far lower than the percentages for petrol and diesel cars.
What is the fuel benefit and should I take it?
The fuel benefit is a separate charge that applies if the company pays for the private fuel of a petrol or diesel company car. It is a fixed charge that is often poor value, so unless you do very high private mileage many directors pay for their own private fuel instead.
What can I claim if I use my own car for business?
You can claim an approved mileage rate from the company, currently 45p a mile for the first 10,000 business miles in the year and 25p a mile after that for cars. Paid at these rates the payments are tax free to you, the company gets relief, and there is no benefit in kind.