There are several options that employers have to offer to their employees:
• Company car
• Company van
• Tax efficient vehicle e.g. electric car
• Car allowance
How does car tax work?
Income tax on a company car is charged on a ‘benefit in kind’ figure, or BIK. The BIK is calculated by taking the P11D value of the vehicle multiplied by a certain percentage, based on the CO2 emissions of that vehicle. Generally, the nicer the vehicle, the higher the P11D value and CO2 emissions of the vehicle, and therefore a higher BIK. If the employee also receives company fuel, then an additional BIK is charged based on a fixed figure multiplied by the same CO2 emissions percentage. Once the BIK figures have been calculated, tax is charged on this as though it is part of an employee’s salary, reducing their take home pay.
Let’s run through a few of the factors to consider when deciding how to provide an employee with a vehicle.
Company car vs company van
One of the most important things to consider is that in a car, an employee’s commute is private mileage. However, in a van, commuting is covered by an exemption, meaning that providing an employee does not use their van for other private purposes, they will not incur any tax. If they do use their van privately outside of commuting, they will only incur a fixed benefit in kind, usually significantly lower than on an average car, generally making vans a win-win solution.
What distances does your employee cover? Generally speaking, the further travelled, the more beneficial a company vehicle is. By the time that an employee is travelling several tens of thousands of miles a year, the personal cost of a lease to cover those miles, for example, is going to significantly outweigh the tax that would be paid on the taxable BIK incurred on a company car.
Employees of a company are able to claim an allowance for company miles travelled in a private vehicle. For the first 10,000 miles, they can claim at 45p a mile, and 25p for every mile thereafter each year. This claim can be set against corporation tax for the company and results in no tax charge for the employee. Therefore, using mileage claims in conjunction with an increased salary to cover some of the vehicle costs may be the most tax efficient way to provide a vehicle, depending on the distances travelled.
Type of vehicle
Whether you would like to see your employee (or your employee would like to) drive around in a Range Rover, Tesla, or VW UP! makes a significant difference to the tax paid. For more expensive vehicles, the benefit in kind tax charge increases. For lower end vehicles, it may be so insignificant that a company vehicle is the obvious solution. One tax efficient solution is electric or hybrid vehicles, though overtime it would seem that the government is intending to reduce the benefit. At present, fully electric vehicles attract a BIK of only 1% of the P11D value for 2021/22. This is expected to rise to 2% in 2022/23.
Each situation is different when it comes
to working out how best to provide your employee with a vehicle, but simple
calculations can show the most cost-effective method of providing a car or a
van to an employee. If you are struggling to work out what is best for both the
company and your employee, then reach out to your accountant, who will be all
too happy to help you.