Complete Guide to Company Cars

What is a company car?

Company cars are vehicles provided to staff by employers for business and personal travel needs. In most cases, this perk is offered to people who drive many miles for their job.

Traditionally, there wasn't a huge choice of company cars for staff, as organisations would buy several vehicles of the same brand and model. But nowadays, employees often have an option from a list of approved company cars, with many employers now including electric vehicles in the mix.

To learn more about company car leasing, check out our guide to business leasing.

How do company cars work?

While company cars are a staff perk, employees typically have to be permanent staff members with a specific need for the vehicle. It's also essential that an employee's salary does not go below the national minimum wage when they take out a company vehicle.

In addition, as an employer is providing this benefit on top of a salary, staff have to pay Benefit in Kind (BiK) tax for this privilege is used outside work.

An employer will have a specific company car scheme in place for anyone looking to get this perk. The process is straightforward for choosing and getting a car:

1. Select your company car from a list of approved models
2. The employer will then get a quote for this vehicle – in most cases, maintenance and insurance can be included for an additional cost
3. The company will go through a credit check and financial application to take out a business lease for the company car
4. When everything is complete and approved, it's time to finalise the order
5. Once everything is signed, delivery of the car is arranged
6. The employee then takes responsibility for the car once it's delivered. They will also have to sign paperwork to ensure they understand the company car scheme and the payments required for this perk

How much do company cars cost?

Company cars vary in price, so it's important to consider how much your company can afford to budget for this staff benefit. Most vehicles have a fixed term between two and four years, so this is another consideration for how long you need a company car.

There are many different brands and models to choose from. If you're looking for an affordable and fuel-efficient ride, Kia and Ford provide a variety of suitable options. However, at the other end of the scale, luxury lease cars are available such as BMW, Mercedes and Jaguar.

How does company car tax work?

Company car tax or BIK is the amount you pay for the perk of having a company vehicle used outside work. While employers pay for this car on top of a salary, it is classed as a financial benefit, so you pay tax on the value of the vehicle to you.

Tax rates on company cars change frequently, and this amount takes into consideration aspects such as the vehicle list price, fuel, emissions, age and engine size. It's also determined by your personal tax bracket.

BIK is paid by anyone who uses a company car for business and personal use, including employees and directors/business owners.

HMRC rates determine the amount you pay, and this is calculated on a P11D form. Once this is done, the amount is deducted from an employee's monthly salary. For more information, read our guide to what is benefit in kind.

How can I minimise my company car tax bill?

Depending on the vehicle, company car tax can be a significant cost for employees. So, here are a few ways to lower it:

1. Choose a low-emissions vehicle – zero and low-emission vehicles have lower BIK rates, which helps keep tax charges down
2. Provide a pool car – vehicles solely used for business travel do not have tax charges attributed to them. You can also claim 100% VAT back on your lease agreement instalments
3. Avoid optional extras – any extras that add value to the list price will mean employees have to pay additional BIK tax
4. Choose a pickup truck or van – most of these vehicles are classed under light commercial vehicles, so they come under BIK standard rates, which could save you money compared to other models
5. Opt for a business edition fleet – some manufacturers offer variants of cars, especially for large orders of company cars. This helps keep the RRP down and the overall value lower for BIK

How are company cars financed?

Company cars are financed through a business. In most cases, companies lease vehicles for employee use, so the individual has no financial ties. This means the company is responsible for the monthly payments of the business lease, and they take care of maintenance, servicing and MOT requirements.

Can I use a company car for private use?

Yes, company cars can be used for personal journeys, including commuting to work. However, if they are used for business and private travel, BIK tax applies.

There are also different rates depending on your car's CO2 emissions and other aspects. So, opting for lower or zero-emissions cars will save money.

How do I work out my car's P11D value?

Company cars are considered a perk, and to work out the tax charge on this benefit, employers will fill out a P11D form so HMRC can determine the cost.

As mentioned above, Benefit in Kind tax is calculated based on the following:

• The list price of the car
• Age of the car
• Fuel type
• CO2 emissions
• Engine size
• Earnings
• Personal tax bracket

Working out BIK can be confusing, so the best way to get an accurate answer is using the HMRC's company car and car fuel benefit calculator.

Below is also an insight into the current BIK rates, which are fixed until 2024-25.

*The rates above apply to vehicles registered after April 2021.

Company car leases at Leasing Options

Business leases are a great option for employees and business owners who regularly travel for work. So, if you're looking to expand your company car scheme and need advice on the best options, chat with our team for further details.