Company Car Tax: Perk or Pitfall?

When contemplating the purchase of a company car—whether as a director or part of an employee benefits package—it’s important to consider far more than the purchase price.

When contemplating the purchase of a company car—whether as a director or part of an employee benefits package—it’s important to consider far more than the purchase price. Ownership structure, funding method, tax treatment and long-term strategy all affect whether the investment makes financial sense.

A company car can be both a reward and a tax-efficient investment, however, the method of acquisition and use has an impact on tax implications, cash flow and financial reporting.

Tax Savings and Costs

Businesses can deduct running costs such as insurance, servicing, and maintenance against profits, reducing corporation tax. Capital allowances may also be claimed on the purchase price, and VAT can often be reclaimed. However, insurance premiums for company cars are typically higher than for personal vehicles, while depreciation will reduce resale value and overall financial return.

Personal use complicates matters as it creates a benefit in kind (BIK) tax charge. Both the individual and employer must account for this, and the liability can be significant, particularly for high-emission vehicles.

Purchase Options

The way the car is acquired has major implications:

  • Leasing spreads costs through monthly payments, which are deductible against profits. Traditionally, the car has not appeared on the balance sheet, although upcoming FRS 102 changes will bring leases onto the balance sheet. Leasing reduces upfront outlay and smooths tax relief, making it attractive for firms with tight or fluctuating cash flow.
  • Hire purchase qualifies for full capital allowances in the year of acquisition. The vehicle is treated as an asset on the balance sheet, with the debt also recognised. This can be advantageous in high-profit years or for companies seeking to increase balance sheet strength ahead of investment or sale. However, the upfront capital commitment and potential impact on financial ratios can limit borrowing flexibility.

Example – Limited Company

  • Profit before car purchase: £75,000
  • Corporation tax payable: £16,125 (effective rate 21.5%)
  • Car purchase: £30,000
  • Taxable profit after allowances: £45,000
  • Corporation tax payable: £8,550 (at a rate of 19%)
  • Corporation tax saving: £7,575

Electric Vehicles (EVs)

Electric cars currently receive generous tax treatment. Companies can claim a 100% first-year allowance on new fully electric vehicles, provided sufficient profits exist. This allows the full purchase price to be deducted immediately.

BIK rates for electric vehicles are very low (currently 3%), making them attractive for both employers and employees. However, these rates are scheduled to rise annually until at least 2029–30, so future costs should be considered.

Charging infrastructure also benefits from tax relief. Businesses can claim 100% allowances on workplace charging points, and some home charger installations are supported by grants. For directors considering EVs, company purchase under hire purchase often maximises tax relief.

Using Personal Vehicles

For some directors and employees, using a personal vehicle for business journeys may be more efficient. Instead of bearing the costs and tax implications of a company car, individuals can claim mileage allowance relief—currently 45p per mile for the first 10,000 miles, then 25p thereafter.

This approach avoids BIK charges, keeps ownership flexible, and can be more tax-efficient for lower-emission vehicles or for employees who do not require a car full-time.

Benefits in Kind (BIK)

Where a company car is available for personal use, it is taxed as a benefit in kind. The taxable amount depends on list price, CO₂ emissions, and fuel type. High-emission cars attract BIK rates exceeding 30%, whereas electric vehicles remain taxed at only 3%.

Employees pay income tax on this benefit, while employers face Class 1A National Insurance. If private fuel is provided, the additional BIK charge can outweigh any perceived advantage, which is why many firms now avoid offering free fuel.

Salary sacrifice schemes involving low-emission or electric vehicles can deliver considerable savings for both employees and employers, combining reduced tax liabilities with predictable costs.

Strategic Considerations

Whether to buy, lease, or avoid a company car altogether depends on usage patterns, profit levels, cash flow, and long-term plans. Leasing offers lower initial outlay and steady tax deductions, while hire purchase maximises upfront allowances and asset recognition. Electric vehicles provide the strongest tax incentives at present, but policy shifts may reduce their advantages over time.

Using personal vehicles with mileage claims remains a simple and often efficient option, especially for occasional business travel.

Ultimately, directors should carefully weigh the pros and cons of each route. Working closely with an accountant ensures that not only tax reliefs but also the wider financial impact—on cash flow, balance sheet, and employee rewards—are fully understood. The most efficient choice will vary by company, but clarity around objectives and long-term strategy is essential before committing to a company car.

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