Taxing times: Motor vehicles

The most common type of vehicle used by employees is a company car, rather than any other type of vehicle. There is no statutory definition of a car within the direct tax legislation. However, VAT Input Tax Order 1992/3222 defines a car as: ‘any motor vehicle of a kind normally used on public roads which has three or more wheels and either – (a) is constructed or adapted solely or mainly for the carriage of passengers; or (b) has to the rear of the driver’s seat roofed accommodation which is fitted with side windows or which is constructed or adapted for the fitting of side windows’.

However, for income tax purposes, a car is simply anything that is not a goods vehicle, motorcycle, invalid carriage or unsuitable and not used for private use (ITEPA 2003, s 115). A goods vehicle, or van, is: ‘a vehicle of a construction primarily suited for the conveyance of goods or burden of any description’ (ITEPA 2003, s 115(2)). The capital allowances definition within CAA 2001, s 268A mirrors this.

So, within direct taxes, the emphasis is the other way round from (and much wider than) VAT – most vehicles with four wheels which can carry people will likely be regarded as a car. Also, double-cab pickups with a second row of seats that can carry passengers beyond those by the driver’s seat are not regarded as goods vehicles for income tax and capital allowances purposes after April 2025, but they may still be vans for VAT purposes.

Tax treatment for cars and vans

For vehicles that are not vans, motorcycles, invalid carriages or have no private usage, the income tax charge on an employee-director who has such a vehicle available for use is based upon the car manufacturer’s list price (not the price paid for it) and a percentage based upon the car’s carbon dioxide (CO2) emissions; even vehicles which produce no such emissions will be subject to a minimum 2% charge; diesel cars suffer a 4% surcharge but the maximum any percentage can be is 37%.

The resulting taxable value, after adjustments for capital contributions and ‘making good’ of the taxable benefit, is then essentially added to the employee’s salary via a form P11D and subject to Class 1A National Insurance contributions on the employer. Drivers of vans or goods vehicles, on the other hand, are taxable on a fixed value (£4,020 for 2025/26), irrespective of their value and CO2 emissions. Vehicles which are not cars or vans (such as motorbikes) are subject to income tax at a rate of 20% on their market value when first provided – just like with an employee using any asset belonging to the employer.

Capital allowances are available for both cars and vans, although for cars, only those with emissions less than 50g/km qualify for main pool rate writing down allowance – everything else is a special rate. Vans and all other vehicles can qualify for the main pool rate; all vehicles except cars qualify for the annual investment allowance for capital allowances, nor can cars qualify for ‘full expensing’ for corporation tax.

Fuel provided by the employer for use in that company car is also taxed – a fixed value (or ‘multiplier’) of £28,200 (for 2025/26) is then applied to the same percentage as the corresponding car; the fuel can therefore be as expensive as the car itself. Often, a user of a company car will therefore just pay for their own fuel and claim business mileage of 45p/25p per mile.

Alternatively, all the private mileage use could be reimbursed to remove the fuel charge using flat rate charges; however, the full amount of private fuel must be repaid for the charge not to apply. However, vans once again have a better deal – provision of private fuel attracts a tax charge on a flat rate of £769.

Practical tip

The use of vehicles, which are cars, attracts an expensive tax charge, but it is important to determine whether the vehicle is a car and not a goods vehicle, in particular to secure greater tax savings. It is possible, too, that paying for one’s own private fuel will be more tax-efficient than that provided by the employer.