Company Car: Is It the Right Choice for You?

A company car can be a valuable perk for employees who frequently travel for work. It offers the convenience of a dedicated vehicle for both business and personal use. However, there are important factors to consider from both the employer’s and employee’s perspectives. In this article, we will explore the pros and cons of having a company car and discuss alternative options to help you make an informed decision.

One significant aspect to bear in mind when contemplating a company car is the tax implications, known as the ‘Benefit in Kind’ (BIK). This tax applies to employees who receive additional benefits or perks alongside their salary. Having access to a company car for personal use requires reporting the BIK. The amount of tax you need to pay depends on the value of the car. However, there are ways to reduce this value, such as:

• Using the car on a part-time basis
• Contributing towards its cost
• Opting for a vehicle with low CO2 emissions
• The actual personal tax you pay will also be influenced by your income level. Basic rate taxpayers are charged 20%, while higher rate taxpayers face a 40% tax on the taxable value.

Let’s explore the advantages of having a company car from an employee’s perspective:

Freedom from Personal Finance Commitments: By having a company car, you avoid the need to personally finance or purchase a vehicle, reducing your financial burden.

Employer Covers Vehicle Maintenance: The cost of vehicle maintenance, including repairs and servicing, is typically covered by the employer, saving you from unexpected expenses.

However, there are drawbacks to consider when it comes to company cars:

• Limited Vehicle Choice: You may not have the freedom to select the specific make, model, or features of the car you are provided, limiting personal preferences.
• High Company Car Tax (BIK): The BIK associated with a company car can be substantial, especially for higher-emission vehicles. This could result in a significant reduction in your take-home pay.
• Lack of Ownership: Since the company owns the car, you do not have ownership rights or the ability to use the vehicle for personal purposes if the company policy restricts such usage.
• Exploring Alternatives: Mileage Allowance

An alternative to a company car is claiming mileage as a tax-free allowance for business travel. Here are some key points to consider:

Tax-Free Allowance: Mileage allowance can be claimed as a tax-free reimbursement for each mile driven for business purposes. It covers various costs associated with running the vehicle, including wear and tear, insurance, and tax.

Reimbursement Rates: As of 2021, the reimbursement rate for mileage is 45p per mile for the first 10,000 miles, and 25p per mile thereafter.

Claiming mileage has several benefits:

• No Personal Tax Implications: Mileage allowance does not have any personal tax implications, providing you with a tax-efficient option.
• Reduced Employer Tax Burden: The company can claim mileage allowance as a cost, reducing its overall tax bill.
• Best Options for Directors/Shareholders

As a director or shareholder who owns the business, additional considerations come into play. Here’s what you should keep in mind:

• Employer and Employee Elements of Benefit in Kind: Being the business owner, you must consider both the personal tax implications for yourself and the employer National Insurance contributions on the benefit provided to employees.
• Tax Charges: The tax charges associated with a company car may outweigh the benefits unless the vehicle has extremely low or nil emissions, such as an electric vehicle.
• Personal Ownership and Mileage Allowance: In many cases, it is more tax-efficient for directors and shareholders to personally own the vehicle and claim mileage allowance for business travel, rather than incorporating the car as a company cost.

Remember, making an informed decision regarding company cars and alternative options will ensure that you choose the most suitable arrangement that aligns with your needs and financial considerations.