Company Cars: Your Essential UK Guide

Company cars have long been a cornerstone of employee benefits in the UK, offering a compelling incentive for staff. The allure of a new vehicle provided by your employer remains strong, and despite the rise of cash allowances, it continues to be one of the most highly valued perks. This guide will demystify the various types of company car schemes, how they operate, and the crucial factors you need to consider before diving in.

Understanding Company Car Schemes

The term 'company car' is a broad umbrella, encompassing several distinct arrangements. These typically include 'business-need' company cars, 'perk' company cars, and 'salary sacrifice' cars. While employee ownership schemes exist, they are complex and less common now, so we'll focus on the first three.

Business-Need Company Cars

A business-need company car is provided by an employer because it is essential for an employee to perform their job duties. These vehicles are typically allocated to staff who spend a significant amount of time on the road, often in roles such as sales, account management, or customer service. Employees receiving a business-need car are generally at a more junior level within the organisation compared to those who qualify for a perk company car.

Perk Company Cars

Perk company cars are offered as part of a broader remuneration package, designed to attract and retain talent. They are usually provided to employees at a specific level or grade within a company and are not contingent on the employee needing a car for their daily tasks. The value of a perk company car is often expressed as a monthly lease value or an overall vehicle budget, especially if the business owns its fleet outright.

Cash Alternative (Car Allowance)

For those eligible for a perk company car, an alternative often exists: a car allowance. This is a cash payment made to the employee, who then uses their own vehicle for business travel. The car allowance is typically paid monthly and is subject to income tax and National Insurance contributions, much like regular salary.

Salary Sacrifice Cars

Salary sacrifice schemes offer a different approach. Employees agree to give up a portion of their gross salary (before tax) in exchange for a company car. This can be particularly attractive due to the tax advantages, especially for electric vehicles. If you're already a company car driver, you might be able to switch to a salary sacrifice arrangement or receive a car allowance that you can then sacrifice for a vehicle. Employees not typically eligible for a company car may also join these schemes, provided it doesn't reduce their income below the National Minimum Wage.

Company Car Choice Lists

The extent of choice offered varies significantly. Employees receiving perk company cars usually have a selection of vehicles to choose from, often dictated by their job grade. Business-need drivers might also have a choice, but it's typically from a more restricted range. Some employers offer complete freedom within a set budget, while others have more stringent controls, often limiting choices to specific manufacturers to leverage better deals through leasing companies. Common restrictions can include body style (e.g., no convertibles), seating capacity, CO2 emissions, and safety ratings (NCAP).

Fleet Management: Buying vs. Leasing

Businesses have two primary methods for managing their company car fleet: outright purchase or leasing through a third-party provider. Leasing is the more common approach, where the business pays a monthly rental for each vehicle. For the employee, the method of financing the company car generally makes little difference to their experience.

Understanding Company Car Tax (Benefit-in-Kind)

If you use your company car for personal journeys, you'll be liable for Company Car Tax, officially known as Benefit-in-Kind (BIK) tax. This is a crucial consideration, especially when comparing a company car offer against a cash allowance. The tax is calculated based on several factors:

Key Factors for BIK Tax Calculation

• P11D Value: This is the car's list price, including optional extras, VAT, and delivery charges, as reported to HMRC by your employer. A lower P11D value generally means lower BIK tax.
• Income Tax Bracket: Your personal income tax rate directly impacts the amount of BIK tax you pay. Higher earners pay more BIK tax.
• WLTP CO2 Emissions: The World harmonised Light-duty vehicles Test Procedure (WLTP) measures a car's CO2 emissions. Higher emissions result in a higher BIK tax percentage.
• Fuel Type: The type of fuel your car uses influences its BIK tax band. Electric vehicles (EVs) and certain plug-in hybrid electric vehicles (PHEVs) benefit from significantly lower tax rates.
• Personal Contributions: Any voluntary payments you make towards the cost of the car or for private use can reduce your BIK tax liability.

Company Car Tax Calculation Formula

The annual company car tax is calculated as follows:

1. Calculate the BiK Value: P11D Value x BiK CO2 Rate (Company Car Tax Band) = BiK Value
2. Calculate Annual Company Car Tax: BiK Value x Income Tax Rate = Annual Company Car Tax

Optional Remuneration Arrangements (OpRA)

OpRA can complicate tax calculations if you have the option of a cash allowance versus a company car. In such cases, you'll be taxed on whichever is higher: the cash foregone or the car's Benefit-in-Kind value. However, this rule generally does not apply to Ultra Low Emission Vehicles (ULEVs).

The Rise of Electric and Hybrid Company Cars

The company car landscape has shifted dramatically towards greener vehicles. Electric cars (EVs) and plug-in hybrid electric vehicles (PHEVs) with an electric-only range of at least 130 miles currently attract a mere 2% BIK tax rate. This is a significant advantage compared to the maximum 37% rate for high-emission vehicles, making EVs and eligible PHEVs exceptionally attractive for company car drivers.

ULEVs and Tax Exemption

Cars with CO2 emissions of 50g/km or less (the definition of ULEVs) are exempt from the OpRA rules. This simplifies tax calculations and offers substantial savings, particularly for EVs and PHEVs.

What's Included in a Company Car Package?

One of the major benefits of a company car is the comprehensive package it usually entails, offering a hassle-free driving experience:

Comprehensive Insurance

Company cars typically come with fully comprehensive motor insurance, covering both business and private mileage. This often extends to the employee's spouse and potentially other household members, subject to age and licence restrictions.

Vehicle Excise Duty (VED)

Your annual VED, commonly known as road tax, is included with your company car.

Maintenance, Tyres, and Repairs

Most company car schemes cover routine servicing, tyre replacements, and general repairs. It's advisable to check your employer's specific policy, as there may be limits on the types or extent of damage covered.

Free Fuel (Optional)

While less common now due to increased taxation, free fuel for business and private mileage was once a popular perk. If offered, you'll need to weigh the tax implications against the cost of fuel for private use. The tax is calculated using the Car Fuel Benefit Multiplier.

Returning Your Company Car

When your contract is up or you're due for a replacement, you'll return your company car. You may have the option to purchase the vehicle. It's important to be aware of the fair wear and tear guidelines, typically based on BVRLA standards. Exceeding these guidelines for damage can result in charges to cover repairs or the diminished value of the car.

Conclusion

Securing a company car can be an exciting prospect. By understanding the different schemes, carefully considering the tax implications, and choosing a vehicle that aligns with current tax benefits (like EVs and PHEVs), you can maximise the value of this significant employee benefit and enjoy a seamless, cost-effective driving experience.

Frequently Asked Questions

What is a business-need company car?

A business-need company car is provided by an employer because it is essential for the employee to carry out their job role, typically for staff who are frequently on the road.

How is company car tax calculated?

Company car tax (BIK tax) is calculated based on the car's P11D value, your income tax bracket, its CO2 emissions, and fuel type.

Are electric cars cheaper as company cars?

Yes, electric cars and certain plug-in hybrids benefit from significantly lower BIK tax rates, making them a more cost-effective company car option compared to traditional petrol or diesel vehicles.

What does 'fair wear and tear' mean for company cars?

Fair wear and tear refers to the expected level of damage a car might sustain from normal use over time. Exceeding these guidelines when returning a company car can lead to charges.

Can I choose any car as a company car?

The choice of company car is usually determined by your employer and your job grade. While some schemes offer more flexibility, there are often restrictions on vehicle type, emissions, and cost.