There are different ways in which your company can provide you with a car, depending on whether it’s just for business use, just for private use, or a combination of both.
Employers have run company car schemes which fall into three types; company-owned vehicles, employee car allowances or an employee salary sacrifice scheme.
We’ll run through them here, but firstly, unless it is used entirely for business, a company car is considered a perk of a job for tax purposes, so is subject to a ‘Benefit-in-Kind’ (BiK) tax based on a set rate.
What is Benefit in Kind (BiK)?
Benefit in kind (BiK) describes any goods or services provided to an you as an employee by your employer for free, or at greatly reduced cost, on top of your regular salary.
Although you’re not paying for this benefit, you still have to pay tax on it. The amount of tax is determined by several factors. These are:
- the price of the car (its P11D value, which is list price without delivery and road tax but with any options plus VAT)
- The car’s official CO2 emissions rating
- the type of fuel your car uses
The emissions part can make a huge difference to how much tax you will pay.
The calculation to work out your annual BiK tax is as follows:
(P11D value of the car) x (BiK tax band) x (your income tax bracket).
What is a traditional company car scheme?
In a traditional company car scheme, the employer owns a fleet of cars (or, more commonly, operates a fleet of cars which are leased or on subscription). All documentation and insurance is handled by the company.
The employees then use the cars for either their work, just for their private use, or a combination of both. Fuel (petrol, diesel, electricity) may also be paid for by the employer for each of these uses.
The company deducts the necessary tax from your salary and keeps records for HMRC. You as the employee don’t need to do anything.
Company car allowance (cash allowance)
A company car allowance is a cash sum which is added to your salary for you to subscribe to or lease a car of your choice. You are charged tax on it as additional salary, not as a BiK, although you need to keep your own records of business mileage vs private mileage.
A business mileage allowance may be available in addition or, if not offered, you can claim business mileage against tax yourself at a flat rate.
However, leasing company Leaseplan warns that ‘while employees may prefer the greater flexibility of cash allowance policies, employers will find it more difficult to ensure that their drivers have cars that are well maintained and appropriately insured… providing cash can encourage employees to drive older, and often more polluting vehicles.’
This can be a problem if the employer has environmental policies relating to vehicles or its corporate CO2 output.
Employee car ownership (ECO) schemes
An employee car ownership (ECO) scheme, which can also be called an employee car purchase scheme, is another way in which businesses provide their employees with cars and has its own definition with HMRC. An ECO is not a traditional company car scheme but is designed to give employees similar benefits to a company car in a way that means BiK doesn’t apply.
Employers usually set up and run their own ECO schemes or they’re set up by specialist third parties. Unlike company car packages, employees don’t have to pay BiK tax because the employee – not the employer – is the registered car owner and pays for it. The employer normally increases taxable pay to compensate.
The employer ‘sells’ a car to an employee under a credit sale agreement (CSA) of a fixed length and mileage. The employee can get a car from any reputable source without becoming involved in the purchasing or financing arrangements in any way but can take advantage of any supplier the employer may use. The employer pays any deposit, but to qualify for an ECO scheme, employees may be subject to credit checks.
Servicing, maintenance, and breakdown cover can all be handled and expensed by the company, which must maintain detailed business mileage records for each driver. As it is the employee’s ‘own’ car, the employer can pay mileage allowance payments (MAPs) for using their own vehicle for business journeys.
The employer is allowed to pay the employee a certain number of MAPs each year without having to report them to HMRC. This is called an ‘approved amount’.
Salary sacrifice – why this can be a win-win
We write a lot about salary sacrifice at The Car Expert, because it has become a very popular way for companies to offer their employees a car as a benefit because of current government policy on electric vehicles (EVs).
Salary sacrifice (or salsac) is a formal agreement where an employee agrees to accept a lower salary and, in return, receives a benefit from their employer which can be benefits such as such as childcare vouchers, free healthcare screening, or cycle-to-work schemes. Salary sacrifice as a whole has been a key feature of UK employment since the 1970s but company cars were added in 2008.
The employee doesn’t pay income tax or Class 1 National Insurance Contributions (NIC) on the portion of salary ‘sacrificed’ but still pays a BiK based on the value of the car and the private fuel it uses. The employer saves the cost of the sacrificed salary and the NIC, incurs the cost of leasing (or subscribing to) the car and pays the NIC on the BiK.
Once the car has been delivered the employer reduces the employee’s gross salary by the amount sacrificed. The reduction is designed to cover the cost of providing the car and running it (servicing, insurance, admin).
EVs and salary sacrifice
As mentioned earlier, your car’s CO2 emissions rating significantly affects its BiK tax rate. The government uses a sliding scale range from a minimum level of 0 g/km to a top level of 170+ g/km, with tax rates that range from 2% to 37%.
EVs emit 0 g/km, so they incur a BiK tax rate of only 2%, whereas to a similarly sized petrol or diesel car will usually have a tax rate of at least 25%. This can save you hundreds of pounds a month on an electric car, and it’s now the driving factor in EV sales.
Overall UK company car emissions are falling. According to June 2023 stats from the government, the average reported CO2 emission of company cars (including electric cars) was 86 g/km, compared to 99 g/km in the previous tax year. For cars with internal combustion engines (which includes plug-in hybrids), the average was 103 g/km. In the tax year 2021 to 2022, only around 2% of company cars had reported CO2 emissions in excess of 165 g/km.
EV BiK rates will increase by 1% per year until 2028, so by the 2027/28 tax year electric cars will be rated at 5%. Pure petrol (non-hybrid) and diesel cars will change very little: for example, those in the 100-104 g/km backet will go from 25 to 26%. So although EV users will start paying more tax, they’ll still benefit massively compared to petrol/diesel/hybrid car users.
This tax certainty (until at least 2028) was campaigned for by the British Vehicle Rental and Leasing Association (BVRLA). It’s a very big deal. The BiK rates for EVs are now seen as crucial for the Government meeting future CO2 emissions targets, and it also helps drive electric cars through to the used car market in a few years’ time once they’ve completed their initial lease agreements with the original customer.
Where once the only way to get a very low BiK company car was to have a very small petrol car, people can now get into a larger EV. The EV-friendly policy also appears to be providing people on average salaries their first chance to drive a new car, especially as EVs are still more expensive than petrol or diesel cars.
In a 2022 BVRLA podcast, Fiona Howarth, CEO of Octopus Electric Vehicles (a partner of ours at The Car Expert) said 60% of its customers taking salary sacrifice packages were 20% tax rate payers.
It seems people love salary sacrifice for a car – not just for the low tax, but because all the admin is taken care of: insurance, servicing, repair bills and home charge points are usually dealt with. That said, traditional company car schemes also usually took care of this.
For employers, offering a salary sacrifice scheme is proving key to staff retention, said Ian Hughes, the CEO of Zenith, a car and van leasing and fleet management company, in the same podcast. “The employee makes a sort of a notional contract with the employer about the duration that they intend to stay with the organisation.”
As an employee, you can sacrifice however much salary you want so long as this does not bring the gross salary below the national minimum wage. You should also check whether the drop is salary is going to harm other finances such as private and state pension contributions, holiday pay, or your ability to pay a mortgage.
But what if I really want a petrol, hybrid, or diesel company car with salary sacrifice?
Even though the growth in salary sacrifice is entirely geared towards EVs (and succeeding in a major way) not everybody wants to drive an EV. Petrol and diesel cars are going to be available new for at least another seven years (possibly twelve…), and some people still strongly prefer their familiarity.
In August 2023, diesel cars made up less than 7% of the market, a share that has been steadily falling for years. But Autocar reported that half of the remaining diesel car sales in the UK are now coming from premium brands. Audi, BMW, Land Rover and Mercedes-Benz accounted for 56% of diesel car sales in the first half of 2023 in the UK, amid a continued decline in popularity of the fuel.
Diesel cars accounted for just over one third of company cars in 2021 to 2022 following a steady decline from 80% of company cars in 2017.
Petrol, diesel or electric car tax examples
If a petrol or diesel is going to cost you more in tax, how much more expensive might this be? Let’s take a premium brand petrol and diesel car and their nearest electric equivalent staying with the same brand/size of car (which is admittedly getting harder to do). We used BMW’s and Kia’s own company car tax calculators as of September 2023.
BMW 3 Series petrol
Trim: BMW 320i petrol Sport saloon
P11D price: £39,295
CO2 emissions: 147 g/km
Fuel economy: 43.5 mpg
BiK charge (34%): £13,360
Monthly tax (20%): £223
Monthly tax (40%): £445
BMW 3 Series diesel
Trim: BMW 320d diesel Sport saloon
P11D price: £42,290
CO2 emissions: 127 g/km
Fuel economy: 58.9 mpg
BiK charge (30%): £12,687
Monthly tax (20%): £211
Monthly tax (40%): £423
BMW i4 electric
Trim: BMW i4 eDrive35 Sport liftback
P11D price: £49,940
CO2 emissions: 0 g/km
Fuel economy: n/a
BiK charge (2%): £999
Monthly tax (20%): £17
Monthly tax (40%): £33
Hybrid (petrol) or plug-in hybrid (petrol) tax examples
A hybrid is a car powered by both a petrol engine and an electric motor which can run on the power of a small battery for a very short range (charged by the petrol engine). Diesel hybrids are a dying breed.
A plug-in hybrid has a larger battery and a longer electric-only range and can be charged from a charger. There are significant tax incentives for plug-in hybrids.
Kia Sportage hybrid
Trim: 1.6-litre T-GDi 3 petrol hybrid
P11D price: £36,015
CO2 emissions: 129 g/km
BiK charge (30%): £10,805
Monthly tax (20%): £180
Monthly tax (40%): £360
Kia Sportage plug-in hybrid
Trim: 1.6 T-GDi 3 petrol plug-in hybrid
P11D price: £41,345
CO2 emissions: 25 g/km
BiK charge (8%): £3,308
Monthly tax (20%): £55
Monthly tax saving (40%): £110
The only way to have a company-funded petrol, hybrid or diesel may be via a cash allowance with which you lease your own car, but it will need to be much larger than you would have paid in tax if the car was owned by the company and provided to you.
Going back to the BMW 320d diesel Sport Saloon, with our Expert Partner Rivervale a BMW 3 320d M Sport automatic with Tech Pack has a P11D list price of £44,685. On a 48-month lease it is £659.72 with VAT and an initial rental of £5,937.48 with VAT
But – and it’s a big but – whichever type of funding scheme, many companies may simply refuse to provide employees with a petrol or diesel as part of an overall environmental commitment, and/or because the deals they can get from car providers for their employees are the best on EVs.
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