Offering a company car as a benefit can be a valuable and attractive perk to any valued employee. Unfortunately, it is not necessarily a tax-free perk, and it may be liable for PAYE because HMRC considers the private use of a company car to be a benefit-in-kind.
In some cases, it can even be quite costly to the employee, especially if the company also pays for the fuel.
- Fuel type
- Carbon dioxide emissions
- The car manufacturer and model
- How long the car is available in the tax year, this will affect the amount of tax the employee has to pay
In addition, the employer may have to pay employer national insurance contributions.
For those looking to reduce their carbon footprint, providing a zero or low-emission car to a worker can be highly tax-efficient. To understand why this is the case, you need to understand how the car benefit-in-kind is calculated.
Calculating tax on company cars
The emissions determine a benefit in kind rate of between 2% (electric cars with zero emissions) and 37% (a highly polluting car) and this is applied to the list price. The exact rate depends on the CO2 emissions g/km the vehicle produces.
So let’s take a mid-range polluting vehicle attracting a 27% benefit-in-kind charge, and a list price of £30,000. The employee would pay either 20%, 40% or 45% tax through their payslip on £8,100 (27% of £30,000). This would be between £1,620 and £3,645 in additional tax every year they had use of the vehicle.
While few people will welcome that level of extra tax hit, you may already perceive that offering staff electric vehicles with just a 2% benefit-in-kind tax rate might still work well as an employee benefit.
The reductions in benefit-in-kind percentage for zero and low-emission cars, coupled with the increased number of models and mileage range on the market, have made such vehicles increasingly attractive as company cars – both to employers and employees.