Over the next few editions of Employer Focus, we’ll be doing a series of back to basics articles to help employers get to grips with the kinds of tax issues they might come across on a day to day basis. This article, the first in the series, will cover some of the ins and outs of taxing company cars.
Background
When an employer provides their employee with a vehicle which they are allowed to use privately, this creates a benefit in kind. This needs to be valued so that it can be taxed. Both the employer and employee will pay tax on the benefit. Further tax is also due if the employer provides fuel (diesel or petrol) for private use by the employee.
In recent years, employers have been incentivised to provide electric cars, because the tax cost of these vehicles is much less than a conventional diesel or petrol vehicle. In this article, we’ll run through the basic rules for conventional cars, and then highlight the potential savings from providing an electric vehicle.
Valuing the benefit in kind – the cash equivalent
To value the benefit, it is important to check first whether the vehicle is a car or a van, as the tax position is very different. Most of the time this will be obvious, but the rules are surprisingly complex and there are certain types of vehicle where particular care needs to be taken, because the vehicle has both car and van- like properties. These include:
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Double cab pickups – a vehicle with an open, flat carrying space plus an extra row of seats behind the driver- usually deemed to be vans
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Crew cabs – a transit van style vehicle with two rows of seats and enclosed carrying space - usually considered cars.
We have written about some of these issues in previous Employer Focus articles, and HMRC has specific guidance on the issues in their Employment Taxes Manual.
Assuming that you are satisfied that you are dealing with a car then, as a basic rule of thumb, the car benefit is calculated as a percentage of:
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the list price of the car
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plus any accessories;
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less any capital contribution made to the car by the employee.
For cars which emit over 50g of CO2/km, the percentage to use depends on the car’s CO2 emissions. For cars with emissions under this level, which tend to be either electric cars or hybrids, the percentage depends on how far the car can travel on a single charge.
Schedules of the percentage to apply for 2023-24 and 2024-25 are available on GOV.UK. The percentages are expected to increase in 2025-26 by 1% - which will increase the tax cost of all company cars – and then be frozen until 2027-28.
HMRC provide a tool to help employers calculate the company car tax.
Taxing the benefit
Once the value of the benefit has been established, this needs to be taxed. Broadly, the employee will pay income tax on the benefit and the employer Class 1A National Insurance Contributions (NIC).
Where the employer payrolls the benefit, then the value of the benefit should be apportioned over the year and added into the employee’s taxable pay. The amount of benefit should be subjected to income tax, but not Class 1 NIC. At the end of the tax year, the employer must also report the value of the benefit in their P11D(b) which is due by 6 July, and pay Class 1A NIC at a rate of 13.8% by 19 July. (This deadline is extended to 22 July for electronic payments.)
Where an employer has not yet moved to payrolling of benefits, a form P46 is needed to report the provision of a car so that HMRC can issue the employee with a new tax code. This will ensure that the employee pays income tax on the benefit. The employer will need to report the benefit on their P11D forms to pay the Class 1A on the benefit at the end of the year.
Fuel
Where an employer pays for fuel for private journeys (including ordinary commuting) then this creates a separate fuel benefit. This is calculated by multiplying a fixed sum (£27,800 for 2024/25) by the same percentage based on CO2 emissions of the vehicle used to calculate the car benefit. This figure is deliberately set high to discourage employers providing private fuel.
In most cases, rather than provide fuel, employers will ask employees using a company car to record their business miles and will reimburse the fuel costs using HMRC’s advisory fuel rates. These are updated regularly to reflect current fuel prices.
Electric and ultra low emission hybrid cars
In recent years, a number of tax incentives have been introduced to encourage employers to provide either fully electric cars or hybrid vehicles instead of traditional diesel or petrol vehicles. Over time these have been tightened up, so the main benefits now accrue to fully electric vehicles, with some modest benefits for using ultra-low emission cars which have emissions of under 50g of CO2 per km.
For fully electric vehicles, the percentages used to calculate the value of the benefit in kind is 2% for 2024/25. For ultra-low hybrid vehicles, the percentage ranges from 2 to 14% depending on the mileage that the car can travel on a single charge. This keeps the benefit in kind costs down for both employees and employers.
Employers are also able to provide charging facilities for electric company cars at work or, for company cars only, at the employee’s home. They can also meet certain electricity costs without creating a benefit in kind.
For full details of the benefits of electric cars, ATT technical officer Emma Rawson has a webinar which is available to book until July.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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