Despite successive Governments changing the rules to increase the tax take, the provision of company cars remains one of the more popular benefits an employer can give to an employee.
Benefit in kind
A director or employee who earns more than £8,500 is charged an amount as a benefit in kind (BIK) if the car is used by an employee but owned by the employer. The calculation is a percentage of the car’s list price appropriate to the level of the car’s CO2 emissions, i.e. the higher the CO2, the higher the tax. An additional rate is charged in respect of car fuel provided for private use. With fully electric vehicles increasingly becoming the ‘norm’ 2020/21 saw the BIK charge reduce to 0% before rising to 1% in 2021/22 and then 2% through to April 2025. This massive reduction in percentage makes arguments for a company car alternative seem outdated. However, there is still a place for alternatives.
A company car allowance is a cash allowance added to the employees’ salary allowing them to purchase or lease a vehicle privately. It offers the employee the perks of having a new vehicle without the employer having the hassle of running a car fleet. As the payment paid is part of the salary it is charged to tax at the usual income tax and NIC rates under PAYE.
There are no set rules as to the amount that the employer can pay as a company car allowance but it is generally assumed that the cash offered will be approximately the same amount as the employer would have paid to lease the company car.
Employees paid an allowance
Where an employee is paid an allowance for using a personally owned car on business, this is tax-free up to a certain point. Currently, if the payment made is 55p for example, for each business mile 45p of this can be claimed and paid tax-free; the balance of 10p being taxable. How the payment is made will determine whether an exemption is allowed for NI purposes. To avoid the NIC charge car allowances need to be paid in proportion to the amount of business travel and then the 45p per mile exemption can be claimed.
If directors or employees are paid a fixed allowance towards their car’s running costs, then the amount needs to be on a sliding scale linked to the expected business mileage (e.g. those who expect to travel up to 4,000 miles per year receive one set rate, up to 8,000 miles a different amount and above that another etc.) This way, initially NIC will be payable on the allowance and then, the NI-free element of the allowance can be calculated when the exact business mileage is known; any amount overpaid can be refunded.
Using your own car
Many employees use their own car for business purposes and pay for the fuel used via a company fuel card. For a car fuel tax charge to arise, the employee must first be chargeable to tax in respect of the car, which means it must be a company car and used by either a director or an employee. There will be a BIK charge on the cost of the private fuel obtained by using the company card unless the employee reimburses for the private fuel used.
To ensure that the rules are adhered to, the company should have a written policy in place as confirmation. In addition, procedures should be put in place to keep accurate mileage records and a monthly amount for private mileage can then be deducted from net salary.
Partner Note: ITEPA 2003s 121; HMRC ‘Expenses and benefits for directors and employees – a tax guide’: section 480; National Insurance Manual NIM16173