When chosen wisely, a company car can be a very tax-efficient benefit, particularly if the employee’s car is a cheap, low-emissions model. However, an expensive, high-emission car can result in a significant tax hit. An additional tax charge may apply if the employer also covers the cost of private journeys in a company car. To empower clients to make informed decisions, it’s crucial to understand how company cars are taxed, both in the current and future tax years.

Benefit-in-kind tax charge

A taxable benefit arises when a car is made available for an employee’s private use due to their employment. The cash equivalent of the benefit depends mainly on the car’s list price and CO2 emissions. Adjustments are made for the employee’s capital contributions, periods of unavailability, and employee contributions made as a condition of the car’s availability for private use.

The list price of the car

The taxable amount is based on a percentage (the ‘appropriate percentage’) of the car’s list price, which is the inclusive price (including delivery charges and relevant taxes) for a car of that kind if sold in the UK, singly, in a retail sale, on the open market, on the day before its first registration. This can differ from the employer’s purchase price, particularly for second-hand cars. The list price is adjusted for optional accessories added to the car. If an employee makes a capital contribution to secure a higher specification model or optional accessories, the car’s price used to calculate the taxable benefit is reduced by up to £5,000.

Appropriate percentage

The appropriate percentage, which determines the taxable amount, is heavily influenced by the car’s CO2 emissions. For the 2024/25 period, it ranges from 2% for electric cars and hybrids with an electric range over 130 miles to 37% for cars with CO2 emissions of 160g/km or more. This means that the higher the CO2 emissions, the higher the tax liability. For cars with CO2 emissions between 1 and 50g/km, the appropriate percentage also depends on the electric range. The taxable amount is adjusted for periods of unavailability (at least 30 days) and private use contributions made by the employee before specific deadlines.

Future changes

It’s important to note that the appropriate percentages for all cars will increase by one percentage point in 2025/26. For cars with CO2 emissions below 75g/km, the appropriate percentage will increase further in 2026/27 and 2027/28. Despite these increases, an electric company car will remain a tax-efficient benefit. This information is crucial for our clients to plan their future tax strategies effectively.

Fuel for private travel

A separate charge arises when the employer meets the cost of fuel for private journeys, except for electric cars. The taxable amount is calculated by multiplying the appropriate percentage used for the car benefit by the multiplier for the year (£27,800 for 2024/25). This can result in a high charge, and providing fuel for private travel is unlikely to be tax-efficient unless the employee’s private mileage is high. However, employers can provide or meet the cost of electricity for private travel in an electric car without a tax charge, making it a valuable benefit.

Class 1A NICs

Employers will pay Class 1A National Insurance contributions on the cash equivalent of the car and fuel benefit, so they also benefit when employees are allocated low-emission cars. When choosing or allocating company cars, it’s important to consider the associated tax cost for both current and future years.