Company car tax

Share This Guide, Choose Your Platform!

Introduction -company car vs mileage

As a UK limited company contractor, let us compare the costs of a company car vs mileage allowance in your own private vehicle for business journeys.

First, how do both scenarios compare for company car costs compared to mileage allowance for private vehicle use in terms of tax savings? In addition, what are the taxes payable?

Indeed, running a company car through your business has advantages and disadvantages. As a result, the tax savings and costs will depend on the type of car that you are using and how many miles you travel in the vehicle. Key to note, your contractor accountant will be able to help you work out the tax position.

We have also written about using a bicycle or motorcycle for work journeys. This looks at the considerations between company-owned and privately owned bikes. This is a good read if you consider using this travel method. 

Initial considerations

Please note, in most cases, UK contractors will travel to work each day by car. However, since the pandemic, some will now spend more time working from home.

In most cases, the journeys by contractors who travel to work by car will consist of visiting their main client site(s). Furthermore, business journeys by car could include:

  • Visits to other work-related sites.
  • To attend training sessions.
  • Attend conferences and seminars.

Knowing what you can claim for can be confusing when you use your car for business reasons. Therefore, this article will aim to make this clearer for you.

Important to note that if you are a sole trader, there is no actual concept of a company car. Indeed, this is because you and your business are the same legal entity. In contrast, when you have your own company, both you and your company are two separate legal entities. Therefore, when you have your own company, it can own a vehicle and provide this to you as an employee of your company. 

Company car versus mileage -mileage rates for private vehicle use for business

For sole traders 

Please note that sole traders have a choice of two methods. As a sole trader, you will be able to work out what you can claim for mileage when you use your own car for your work journeys:

  • The first option is the `mileage method.’ To clarify, you can use this method if you have never claimed capital allowances on your car. This method gathers the total business mileage travelled during the tax year. As a result, you can convert it into mileage allowances by claiming at the HM Revenue & Customs’ (HMRC) approved mileage rates. Key to note, 45 pence per mile is claimable for the first 10,000 miles travelled in the tax year (6 April to 5 April). After this, 25 pence can then be claimed for each mile after that; or
  • The second choice is the `actual cost method.’ What’s more, this way of calculating what you can claim takes the total business mileage and compares it against the total overall mileage. Once you have done this, you can calculate a percentage of the total miles related to your business journeys. Next, you can take this percentage and apply it against the total cost of all of your car’s various running costs. As a result, you can then calculate the proportion of your vehicle running costs that you can claim as a business expense.

To sum up, whichever choice you make from the above, your claim will reduce your taxable profits. As a result, this will also reduce the tax and NI you pay on these. 

For contractors

Firstly, most contractors will tend to work via their own company or perhaps via an umbrella company.

You can go ahead claiming mileage on taxes when you use your private vehicle to travel to work. Furthermore, you will claim your mileage allowances under HMRC’s approved mileage rates.

Please note, as above, the rates you can claim are 45 pence for the first 10,000 miles travelled in the tax year. After this, the rate is 25 pence per mile for each mile. Key to note, these rates intend to compensate the employee for the overall car running costs that they incur. This will include fuel, repairs and maintenance, road tax, and insurance. Therefore, if you are running your own company and you are using your private vehicle for business, your company can reimburse your mileage at the above rates, and in turn, this will save tax.

As a side note, there are a couple of other car-related costs that you can claim you are using your private car for business journeys. These are:

  • Parking fees.
  • Road tolls.

In summary, when you use your private car for business journeys, the company will save Corporation Tax (CT) at 19% on the sum of the mileage, parking fees and any road tolls. 

Company car vs mileage allowance in your private car -considerations     

A company car

You may be considering arranging for your company to provide you with a company car. When you do, the company will save CT on the various car running costs. Please note that although depreciation on the actual vehicle cost is claimed in the accounts, the company will save CT on the car cost through Capital Allowances. These, in turn, are applied in the company’s CT computations.

If the company allows you to use the car for private journeys, there is a tax cost. As a result of private miles in a company car, the tax cost is based upon what is called Benefits in Kind (BIK). This BIK is what results in the company car tax. Therefore, we will need to know how to calculate company car tax.

HMRC will need the fuel type and other details of your vehicle when you report the benefits to them. Therefore, as mentioned, when we look at how to work out company car tax, this is calculated on the BIK. Notably, when we work out the BIK, this is based on either:

  • The car’s CO2 emissions when it is a regular petrol or diesel car, and most hybrid cars. CO2 represents the amount of carbon dioxide that the vehicle emits. Once the CO2 emissions figure is known, you can calculate the percentage rate. This, in turn, is applied to the car’s list price to calculate the BIK.
  • The car’s electrical range, if it is an electric car. Once the electrical range is known, you can calculate the percentage rate. This, in turn, is applied to the car’s list price to calculate the BIK.

Taxes

As the director/employee provided with the company car, you will pay tax on the benefit via your tax code, which is applied to your salary. Meanwhile, the employer will pay National Insurance on the benefit. Therefore, how can you work out the amount of company car tax you will pay?

  • BIK is taxable on the employee at their highest tax rate (the tax bands are 20%, 40% or 45%). Please note that the BIK is included in their tax code that applies to their salary.
  • The BIK is taxable on the employer as Class 1A National Insurance(NI) at a rate of 15.05%.

To sum up, the company will save CT on the car running costs and actual car costs (under Capital Allowances). However, the company and the director will also incur company car tax/NI on the BIK. Therefore, we will look at how to work out and calculate company car tax compared to using your private car.

Company car versus mileage -a look at hybrid and electric cars

First of all, with the rising company car benefits in recent years gone by, it is now usually no longer beneficial to be running a company car. This is especially the case where the vehicle has a large engine size and high CO2. Notably, because of this, many refer to such vehicles as `gas-guzzlers’.

However, in some cases, it can be tax efficient to run a company car that has low CO2 emissions. What’s more, it can be even more beneficial if your car is a hybrid or electric-type vehicle. Electric cars are becoming more popular daily, and a plug-in hybrid car is another popular option.

Indeed, any `normal’ vehicle that does not have ultra-low emissions will be more expensive to run as a company car than a private vehicle. Therefore, the type of car is an important consideration when you want a company car for the future.

Hybrid and electric cars (continued)

It is also worth noting that the latest electric and hybrid cars, which are very tax-efficient, can also be expensive to purchase.

Therefore, it is worth running this past your accountant if you consider purchasing a company car. Most importantly, they will be able to work out if this will or will not be tax-efficient for you. Indeed, your accountant can also help you to choose an option that fits your circumstances. As a result, you should not end up paying any extra taxes.

Today, the rates that company cars are taxed are dependent on:

  • The level of CO2 that the car emits from petrol and diesel cars; and
  • The electric range for electric cars.

You can use a company car tax calculator to work out any benefits or work these out yourself or via your accountant. Therefore, let’s now take a look at this more closely.

Road tax

When you own a car in the UK, you must pay road tax annually. Please note that this charge is based on the CO2 emissions of your vehicle. In addition, when you buy a new car in the UK, there is a fee of £55 if you register and tax a car for the first time with DVLA.

It should be noted that there is currently no vehicle excise duty (road tax) on electric cars. Therefore, if you buy an electric vehicle:

  • You will still have to tax your vehicle from the outset; and
  • Then renew your electric car road tax every 12 months, even though there is nothing to pay.

If you buy a hybrid car, the road tax rate will depend on the year of registration and CO2 emissions. Please note that more information can be found online regarding your vehicle type.

Company car vs mileage allowance in private car -a comparison

The current company car BIK rates start at:

  • 2% for electric cars.
  • 23% for the greenest hybrids.
  • 25% for any car with 100 g/km CO2.

From 14%, the bands rise in 1% increments up to a maximum of 37%, with diesel models subject to a 4% supplement, should they not meet RDE2 tests.

Company car vs mileage allowance -the company car BIK rates

The table below shows how the percentage BIK rates vary with vehicle CO2 and electric-only range. This represents petrol, diesel, hybrid and electric-related BIK rates for the tax years 2022-2025. Please note that the table below uses current WLTP-derived CO2 data for cars registered from April 2020. In addition, please see the separate table below for NEDC-derived CO2 BIK rates for models registered before April 2020.

WLTP BIK Rates April 2022 to March 2025
The table shows BIK rates for models registered from 6th April 2020, based on official WLTP CO2 figures.
Vehicle
CO2
(g/km)
Electric
range
(miles)
FY 2022-23
%BIK Rate
FY 2023-24
%BIK Rate
FY 2024-25
%BIK Rate
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
0 2 2 2
1-50 130+ 2 2 2
1-50 70-129 5 5 5
1-50 40-69 8 8 8
1-50 30-39 12 12 12
1-50 <30 14 14 14
51-54 15 15 15
55-59 16 16 16
60-64 17 17 17
65-69 18 18 18
70-74 19 19 19
75-79 20 24 20 24 20 24
80-84 21 25 21 25 21 25
85-89 22 26 22 26 22 26
90-94 23 27 23 27 23 27
95-99 24 28 24 28 24 28

100-104

25 29 25 29 25 29
105-109 26 30 26 30 26 30
110-114 27 31 27 31 27 31
115-119 28 32 28 32 28 32
120-124 29 33 29 33 29 33
125-129 30 34 30 34 30 34
130-134 31 35 31 35 31 35
135-139 32 36 32 36 32 36
140-144 33 37 33 37 33 37
145-149 34 37 34 37 34 37
150-154 35 37 35 37 35 37
155-159 36 37 36 37 36 37
160-164 37 37 37 37 37 37
165-169 37 37 37 37 37 37
170+ 37 37 37 37 37 37

 

Company car vs mileage -notes to the above

** The rate applies to diesel vehicles not meeting the RDE2 standard. For diesel-hybrids, the Non-RDE2 4% diesel surcharge does not apply. All BIK rates will apply to cars registered from April 2020. Source: HMRC 2021.

4% supplement for non-RDE2 compliant diesel vehicles.

HM Treasury levies a 4% diesel supplement over petrol models to account for greater levels of NOx emissions for the most current diesel cars. This supplement applies to diesel cars that are not compliant with the Real Driving Emissions Step 2 (RDE2) test, which confirms that real-world emissions are close to, or better than, the Euro 6 emissions standards for NOx.

NEDC BIK Rates April 2022 to March 2025
The table shows BIK rates for models registered before 6th April 2020, based on official NEDC CO2 figures.
Vehicle
CO2
(g/km)
Electric
range
(miles)
FY 2022-23
%BIK Rate
FY 2023-24
%BIK Rate
FY 2024-25
%BIK Rate
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
Petrol,
Electric,
RDE2
Diesel**
Non-
RDE2
Diesel**
0 2 2 2
1-50 130+ 2 2 2
1-50 70-129 5 5 5
1-50 40-69 8 8 8
1-50 30-39 12 12 12
1-50 <30 14 14 14
51-54 15 15 15
55-59 16 16 16
60-64 17 17 17
65-69 18 18 18
70-74 19 19 19
75-79 20 24 20 24 20 24
80-84 21 25 21 25 21 25
85-89 22 26 22 26 22 26
90-94 23 27 23 27 23 27
95-99 24 28 24 28 24 28

100-104

25 29 25 29 25 29
105-109 26 30 26 30 26 30
110-114 27 31 27 31 27 31
115-119 28 32 28 32 28 32
120-124 29 33 29 33 29 33
125-129 30 34 30 34 30 34
130-134 31 35 31 35 31 35
135-139 32 36 32 36 32 36
140-144 33 37 33 37 33 37
145-149 34 37 34 37 34 37
150-154 35 37 35 37 35 37
155-159 36 37 36 37 36 37
160+ 37 37 37 37 37 37

 

Notes to the above

** The rate applies to diesel vehicles not meeting the RDE2 standard. For diesel-hybrids, the Non-RDE2 4% diesel surcharge does not apply. All BIK rates apply to cars registered since 1998. Source: HMRC 2021.

How to calculate BIK

Car fuel benefit 25,300 x the appropriate percentage
Van benefit 3,600
Van fuel benefit 688

Example of private mileage v company car tax comparison

2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC
Company car (£) Private car (£)

CT savings:

The vehicle running costs:
Fuel for the car 2,400
Repairs of the car 1,000
Insurance costs 500
Road Tax costs 200
Class 1A National Insurance 2,538
The Capital allowances on the vehicle that costs 37,155 x 18% 6,688
Mileage -27,000 miles:
10,000 miles at 45p 4,500
17,000 miles at 25p 4,250
Total costs 13,526 8,750
CT saved at a rate of 19% 2,570 1,663

Company car tax:

2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC. The CO2 emissions are 114 CO2
114 CO2 is equivalent to 26% of the list price of treating the car as a benefit in kind.
List price 37,155 x 27% 10,032
Car fuel 25,300 x 27% 6,831
Total benefits in kind 16,863
Basic rate Higher rate
taxpayer taxpayer
Tax on the contractor at an income tax rate of 20% 3,373
Tax on the contractor at an income tax rate of 40% 6,745
The Class 1A National Insurance at 15.05% 2,538 2,538
Total taxes on the company car 5,911 9,283
The overall tax savings for the company/individual:
Corporation Tax savings 2,570 2,570
The Taxes on benefits in kind -5,911 -9,283
Therefore, the overall tax savings (costs) for the company/individual are -3,341 -6,713

 

How to work out and calculate company car tax -conclusion 

Company car versus mileage -the results

To sum up, as you can see, in this example, to run the BMW through your company, the overall tax bill would be £3,341 in company car tax costs per annum if you are a basic rate taxpayer. Alternatively, if you are a higher-rate taxpayer, it will cost you £6,713 in tax costs.

In contrast, you will make overall annual tax savings of £1,663 if you keep the car as a private vehicle and claim mileage allowances.

The company will also reimburse the mileage allowances (£8,750 in this example) to the director tax-free. As a result, this reduces the amount of your drawings that are taxable income.

In conclusion, this example shows that you would be considerably worse off running the BMW through your company due to the high CO2.

Hire car option

A further option is to consider car leasing. As with the company owning the vehicle, when it comes to business leasing there will be a benefit in kind based on the same method, by applying a percentage rate to the vehicle’s list price.

Please note that the company can claim the hire costs as an expense (as opposed to claiming the cost of the car). In addition, the business can reclaim 50% of the VAT on the hire costs if it is VAT registered and operates under the standard/normal VAT scheme.

Going for the hire car option in the above example would result in a similar outcome: being worse off by hiring the car through your company. However, like when you buy an electric vehicle, you will probably be better off when you hire one of these.

Final thoughts

Today, most contractors will run their vehicle as a private car and claim business mileage through their company. In contrast, the few with company cars tend to have electric or hybrid vehicles or a vehicle with low CO2 if they use a regular car.

Finally, very few run a `gas-guzzler’ because the tax repercussions are not worth it with today’s tax system.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: August 1st, 2022 / Categories: Expenses /

Share This Guide, Choose Your Platform!

Leave A Comment