Did you know that company cars are losing popularity? Company cars are falling out of favour for various reasons, such as changing attitudes, environmental concerns, tax changes, unexpected costs and economic uncertainty. For example, according to FleetCheck, company cars are losing their appeal as a ‘status symbol’ as employees focus more on efficiency than badge appeal.
What is a company car?
A company car is a car that is owned or paid for by a company and given to an employee to use as their own, usually as a benefit of having a particular job, or because their job involves a lot of travelling. According to the Oxford Dictionaries, a company car is defined as “a car provided by a firm for the business and private use of an employee”.
Some company cars may be exempt from tax or other charges, depending on how they are used or what type of fuel they run on, according to Cambridge Dictionary. Company cars may also have different implications for the status or personality of the employee who drives them.
What are the benefits of company cars?
Company cars are vehicles provided by an employer for company car drivers to use for both business and private use. There are several benefits of company cars, both for the employee and the employer.
For example, for the employee, a company car can save them money on buying, maintaining, insuring and taxing their own car. Employees can also have the pleasure of enjoying driving a new or high-end car they they may not have otherwise been able to afford.
For the employer, providing a company car can be a way of rewarding staff, as well as attracting new talent. A company car can work wonders in enhancing the image and reputation of the business, especially if the car is branded with the company logo or name. A company car can also reduce the risk of liability and compensation claims if an employee is involved in an accident while driving their own car for work purposes.
Disadvantages of a company car
As with anything, there are of course drawbacks to having a company car. For the employee, a company car is subject to Benefit-in-Kind (BIK) tax, which is based on the value, fuel type, and CO2 emissions of the car. The employee will also have to pay fuel benefit tax on any fuel allowance they receive from their employer for personal use. Company car fuel benefit can be calculated by using the HMRC’s company car and fuel benefit calculator, to estimate how much tax you might pay for different cars. Additionally, a company car may have restrictions on who can drive it, where it can be parked, and how it can be used, which you would probably expect anyway.
For the employer, a company car can be a significant expense, as they have to pay for leasing, insurance, maintenance, fuel and tax. They also have to keep records and report any changes to HM Revenue and Customs (HMRC). Furthermore, a company car can increase the environmental impact of the business, as it may encourage more driving and emissions.
How does company car tax work?
Company car tax is a tax that you pay if you use a company car for personal purposes, such as commuting. The amount of tax you pay depends on the value and the emissions of the car, as well as your income tax rate.
The value of the car is based on its P11D value, which is the list price plus any optional extras, VAT and delivery charges. The emissions of the car are measured by its CO2 and NOx levels. The lower the emissions, the lower the tax rate. For example, diesel cars have a 4% surcharge, unless they meet the RDE2 standard for NOx emissions.
To calculate company car tax and how much tax you pay, you multiply the P11D value by the tax rate, and then multiply that by your income tax band. For example, if you have a petrol car with a P11D value of £20,000 and CO2 emissions of 100g/km, and you are a 20% taxpayer, you pay: £20,000 x 23% = £4,600, £4,600 x 20% = £920. So you end up paying £920 per year in company car tax.
When is a vehicle a company car?
A vehicle is a company car if it is provided by an employer for both business and private use by an employee.
There are of course different types of company cars, depending on how they are chosen and used. Some company cars are ‘user-choosers’, which means the employee can select a car from a list provided by the employer. It could be a new car company cars list that you have the pleasure of choosing from. The list may have certain limitations, such as budget, fuel type, or CO2 emissions, says AutoTrader. Other company cars are ‘job-need’, which means the vehicle is an essential part of the employee’s role, such as a delivery van or a sales car. These cars tend to be more practical and less luxurious, and an employee, may have less or no choice about what they drive.
What’s the difference between a company car and car allowance?
A company car and a car allowance are two different ways of providing a vehicle for an employee to use for work purposes. A company car is a vehicle that is owned or leased by the employer and given to the employee to use for both business and personal trips. A car allowance is a cash sum that is added to the employee’s annual salary, and intended to cover the cost of buying or leasing a car of their own as their own vehicle, says the Lease Fetcher.
The main difference between a company car and a car allowance is how they are taxed. A company car is subject to BIK tax, which is based on the value and emissions of the car, as well as the income tax rate of the employee. A car allowance is taxed as part of the employee’s salary, which means they pay income tax and National Insurance contributions on it.
Depending on the value of the car, the amount of the allowance, and the tax rate of the employee, one option may be more financially beneficial than the other. Generally speaking, a company car may be more advantageous for employees who drive a lot of miles for work, as they can save on fuel costs, maintenance, and insurance costs.
Whereas, a car allowance may be more attractive for employees who want more choice and flexibility in their car model selection, as well as the possibility of owning the car at the end of the lease or loan.