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Are Company Cars Tax Efficient?

There are several factors to consider when looking at the pros and cons of a company car. This topic has long been a focal point of discussion among our recruitment partners, prompting us to compile this informative guide. Company cars entail cost and tax implications for both the business and the individual receiving the car. In this article, we will examine two different options: petrol or diesel cars and 100% electric cars.

Example 1: Petrol or Diesel Cars

Ford Focus 1L EcoBoost Petrol – 118g/km – £30k purchase price (as an example)

Purchasing a petrol or diesel car

VAT cannot be reclaimed if you purchase a company car outright or through a Hire Purchase (HP) agreement. This is because the vehicle will also be used for private purposes. Capital allowances allow for a tax-deductible portion of the car’s value against corporation tax, determined by the CO2 emissions. For emissions under 50g/km, 18% can be claimed annually, while emissions over 50g/km allow for a 6% deduction annually.

In our example, with emissions above 50g/km, a 6% deduction of £1,800 results in a £342 tax saving at a 19% corporation tax rate.

Leasing a petrol or diesel car

Only half of the VAT on each monthly instalment is reclaimable due to private use. The monthly lease payments are recorded as costs in the profit and loss statement. Capital allowances cannot be claimed against corporation tax since the vehicle is not owned by the business. However, relief against corporation tax depends on CO2 emissions. With emissions of 50g/km or less allowing for 100% of lease costs to be claimed and emissions over 50g/km allowing for 85% of lease costs to be claimed.

Using our example, as car has emissions over 50g/km, there is an 85% allowance. If the monthly lease payments are £450 (£5,400 annually), £4,590 would be allowable to deduct against your corporation tax. If your corporation tax rate is at 19%, you will receive an £872 tax saving.

Personal Tax – Benefits in Kind

Personal tax implications arise from the “benefit” of having a company car, reported at the end of the tax year to HMRC by the employer via a P11D form. If you are eligible for completing a self-assessment tax return, you will need to include this to calculate the self-assessment tax due.

The benefit in kind is calculated based on the car’s list price when new, along with any additions like trim or sound system upgrades. It doesn’t matter if you purchased the car second hand or not, the benefit in kind will still be calculated using the list price.

The percentage of the list price that you will pay tax on each year is determined by the CO2 emissions. On top of this, the company must pay Class 1A National Insurance at 13.8% on the benefit in kind value. If the business also pays for fuel, this will increase the benefit in kind to pay tax on.

Using our example:

Benefit in Kind = £8,700 (£29,000 * 29%)

Tax payable at basic rate 20% = £1,740 (£8,700 * 20%)

Class 1A NIC’s = £1,200 (£8,700 * 13.8%)

Summary – Cost of Purchasing or Leasing Petrol or Diesel Cars

Lease

Purchased

Costs
Class 1 A NIC £1,200.00 £1,200.00
VAT unable to claim £540.00 £6,000.00
Tax payable on BIK (20% Basic Rate) £1,740.00 £1,740.00
Tax payable on BIK (40% Higher Rate) £3,480.00 £3,480.00
Tax relief
Lease @ 19% Corp tax rate £328.00
Purchase – Capital Allowances @ 19% CT £342.00
Total cost in the year – Basic Rate 20% £3,152.00 £8,598.00
Total cost in the year – Higher Rate 40% £4,892.00 £10,338.00

 

Example 2: Electric Cars

Nissan Leaf – 0g/km – £29,000 purchase price (as an example)

Purchasing an electric car

Like petrol and diesel cars, VAT cannot be reclaimed due to personal use on electric cars. For maximum tax efficiency, you will need to look at brand new, zero emissions cars. These have 100% capital allowances during the year of purchase, which can result in a substantial corporation tax saving.

Using our example, if your Corporation Tax rate is at 19%, you will save £5,510 in the year (£29,000 * 19%)

Second-hand electric cars are given the same treatment as petrol and diesel cars with an 18% allowance. Using our example and a corporation tax rate of 19%, your tax saving with a second-hand electric car would only be £992 (£29,000 * 18% * 19%).

Leasing an electric car

As with petrol and diesel cars, half of the VAT on monthly lease payments is reclaimable. The full lease costs of the electric car can be claimed against corporation tax. For example, if the corporation tax rate is 19%, a £450 monthly lease would result in an annual tax saving of £1,026 (£450 * 12 * 19%).

Personal Tax for electric cars – Benefits in Kind

Benefit in kind taxation for electric cars is based on a percentage of the vehicle’s list price when new and Class 1A National Insurance at 13.8% is payable by the company. As of the tax year 2024/25, this percentage is 2%, increasing by 1% in subsequent years.

Benefit in Kind = £580 (£29,000 *2%)

Tax payable at basic rate 20% = £116 (£580* 20%)

Class 1A NIC’s = £80 (£580 * 13.8%)

Summary – Cost of Purchasing or Leasing Electric Cars (new)

Lease

Purchased

Costs
Class 1 A NIC £80.00 £80.00
VAT unable to claim £540.00 £5,800.00
Tax payable on BIK (20% Basic Rate) £116.00 £116.00
Tax payable on BIK (40% Higher Rate) £232.00 £232.00
Tax relief
Lease @ 19% Corp tax rate £1,026.00
Purchase – Capital Allowances @ 19% CT £5,220.00
Total savings or cost in the year – Basic Rate 20% -£290.00 £776.00
Total savings or cost in the year – Higher Rate 40% -£174.00 £892.00

 

As you can see from both summaries, it is more cost effective to the business to lease rather than purchase a car. If you are an SSG Partner and want to discuss the pros and cons of a company car, or if you would like further information on costs and tax implications, please contact your SSG Accountant.

If you are currently working in recruitment and are considering starting up your own recruitment business, please check out our other blogs for specialist advice. Our team of experts are here to assist you in setting up and growing your recruitment business.

Contact us today to discuss your recruitment start-up plans.

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