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5 min read

Company Car v Cash Allowance: what key facts should my business know?

A company car remains a highly attractive “perk of the job”. It’s a key benefit that can help employers to attract and retain the best talent.

An employee may be able to choose the car’s make and model, but their decision will help to determine how much tax they will pay, because HMRC considers company cars to be a benefit-in-kind (BIK).

Less tax is payable on cars with lower CO2 emissions. Pure electric vehicles are no longer exempt, although the tax rates are relatively low. Most diesel cars carry a four per cent surcharge over petrol-engine models.

How much tax is payable?

Government website gov.uk details taxable BIK and expenses payments for company cars; 37% of the vehicle’s “P11D value” is the highest rate. At the end of the tax year, employers must submit a P11D form to HMRC for each employee who has received expenses or benefits.

Employers must pay Class 1A National Insurance contributions on company cars and fuel at 13.8%. A car’s taxable P11D value is not determined purely by its list price (plus VAT and any extras). It’s also determined by fuel type and CO2 emissions and the driver’s own personal tax rate (those earning more pay more tax on their company car). Tax payable will be lower if the car has been off the road for 30 consecutive days or more, for example, following a serious traffic accident.

If an employee forgoes cash for the car under a salary sacrifice scheme, with the exception of ultra-low emission vehicles, they are taxed on the amount of cash forgone or the car’s BIK/P11D value – whichever provides more cash for HMRC.

Car allowance tax rules

Alternatively, an employer may offer their employees a cash allowance to buy or lease their own vehicle for personal and work use.

The allowance is added to the employee’s annual salary, but it’s subject to income tax and National Insurance contributions (rather than BIK taxation). Many employees prefer the greater flexibility they get from a cash allowance.

You can deduct and pay tax on most employee expenses through your payroll, providing you’ve registered with HMRC before 6 April (ie the start of the tax year). Then you don’t need to submit a P11D form.

So, what other key facts should business owners and fleet managers know?

Key facts on company cars

  • The company is responsible for working out the taxable value so that it can report it to HMRC and pay tax due.
  • Commercial payroll software may work out the taxable value for you or you can use HMRC’s company car and car fuel benefit calculator.
  • The company pays for all vehicle running costs, taxes, insurance, etc. Employees don’t pay extra tax for such benefits as maintenance and servicing; repairs; insurance; road tax; membership of AA/RAC, etc.
  • Diesel vehicles meeting the Real Driving Emissions Step 2 standard are exempt from the 4% supplement to a car’s P11D value.
  • Tax payable is not affected by higher mileage, nor age of the vehicle, except for cars registered before 1998, in which case a special charge is applied.
  • Businesses can claim the cost of company car purchases through capital allowances, which reduces their taxable profits (or increases their taxable losses) and tax bills.
  • The capital allowance claimable is based on the car’s CO2 emissions (main rate 18%). Businesses can claim 100% first-year allowances on low-emission cars.
  • The company pays for early termination if a driver leaves the company or the vehicle is declared an insurance write-off.

Key facts on cash allowance

  • Offering a cash alternative to employees can result in greater overall costs for the company.
  • Calculating and administering cash allowances can be more complex and time-consuming.
  • Cash allowances may reduce the volume of vehicles a company buys, which can mean you pay a higher price for each vehicle that you do buy.
  • Your business should ensure that drivers have insurance that covers business use and have a system that confirms this on an ongoing basis.

What should I do if I’m not sure?

Employers and employees should carefully consider the full tax implications before deciding on company cars or whether to opt for a cash allowance instead. Seek tailored guidance from an experienced tax adviser. It could help to minimise your tax bill.    

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Arval UK is a leading provider of vehicle leasing and fleet management solutions for businesses of all sizes. We’re here to help make sourcing and running business vehicles easy.

Based in Swindon for over 40 years, we lease cars and vans. Any make or model, we can help you find the vehicle that’s right for you. But that’s not where our works ends, we support millions of journeys each year through products like servicing and maintenance, breakdown assistance and insured vehicles.

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