Company cars are fairly common, with employers offering them to employees or directors driving one through their own limited company. The rules around who pays what tax on a company car can be a bit complicated though, so we’ll go through how it all works in this article, and whether electric company cars offer a more attractive (and tax efficient) proposition than their petrol or diesel rivals. We talk about leasing a car for your business in another article.

Do I need to pay tax on a company car?

The answer to this partly depends on what you’re using the vehicle for. When a company car is used for personal reasons instead of purely for business, it becomes a ‘perk’.

Even though the perk isn’t cash, it does benefit the employee or director personally. This increases the value of what they get from the company, so it’s treated as a taxable benefit (known as a benefit in kind, or BiK for short). It can mean:

• The individual must pay tax on the value of this benefit
• The employer must pay Employer’s National Insurance Contributions (NICs) on the benefit’s value

If you’re a director and own the car through your limited company, you might end up paying tax on it twice: once as the individual receiving the benefit, and again as the company which provides it.

Who has to tell HMRC?

It’s the employer’s responsibility to tell HMRC about any benefits in kind, including company cars, so that the employer and individual both pay the right amount of tax on the benefit. You can report these through payroll (literally known as payrolling benefits).

Will I pay less tax on an electric company car?

Electric cars can be more tax efficient for limited companies because the amount of benefit in kind tax you pay is based on:

• Its list price. This is the manufacturer’s recommended retail price at the time the vehicle was made available to the individual, including any accessories, optional extras, delivery fees, and VAT
• The car’s BiK percentage rate. This is set by HMRC, and is based on a car’s CO2 emissions value according to the vehicle’s first registration certificate (which is set for the life of the car). The higher the emissions, the higher the rate – which is why electric car tax tends to be lower! We’ll explain this further down.
• The rate of income tax the individual pays

Can I reduce the amount of tax I pay on a company car?

Employees can make ‘capital contributions’ of up to £5,000 towards buying the car, lowering the value of the benefit so there’s less tax to pay.

How much is a car’s BiK rate?

BiK percentage rates can vary from one car to another because they’re charged on emissions. Fully electric cars are currently charged (pun only slightly intended) at a BiK rate of 2% of the car’s list price. This will increase to 3% from April 2025 when the new tax year starts. Some of the most popular petrol cars have a rate of 30% or more.

 
The rates are set by HMRC, and can be checked online. You’ll need to know the car’s CO2 emissions, which are measured in grams per kilometre (g/km). This can usually be found on the manufacturer’s website or in the vehicle’s registration documents. Once it’s set, it won’t change – at least for tax purposes. Your MOT might say something different!
 

Do I need to pay tax on the fuel in my company car?

It depends on who pays for it! If you put fuel in the car, you can use it to make personal trips or get your company to reimburse you for any business miles you do. It’s a bit different if the company pays for fuel used on personal journeys. This is classed as a perk, so you’ll pay tax on it.

Unlike petrol and diesel though, electricity is classed as a ‘fuel’ in this case. You won’t need to pay the fuel benefit tax if you drive an electric car, even if your company pays for charging and you use it for personal mileage.

How do I work it out?

The tax is also known as a ‘car fuel benefit charge’. It’s worked out using the Car Fuel Benefit Charge Multiplier which is set by HMRC each year.

 
You’ll multiply it by what HMRC mysteriously refer to as ‘the appropriate percentage’. This is the BiK percentage rate which is based on CO2 emissions. The next step is to multiply the answer by the rate of tax you pay.

Should I get an electric company car?

Like any business decision, this depends on your needs and preferences! If you’re going to have any sort of company car which you drive for personal reasons, then an electric one is likely to be more tax efficient – but you might also need to think about size and usage.

What sort of company car should I get?

Again, this should be based on what you need from the vehicle, and what your company can afford to pay. We’ve calculated the tax payable on some of this year’s most popular company cars so you can compare options in the table below. The amounts are based on the rates for 2024/25.

Remember: The company can claim the cost of providing the benefit and the employer’s National Insurance it pays on it as an allowable expense. We’ve shown this as a total in the column called ‘Corporation Tax Relief’.

Capital Allowances and company cars

Capital allowances mean companies can claim tax relief on the assets they buy which, in turn, reduces their Corporation Tax bill. This doesn’t include leased or hybrid cars.

Fully electric vehicles which are:

• New and unused: Qualify for 100% first-year allowances, so you can claim tax relief on the full value of the asset
• Second hand: Only qualify for main rate 18% capital allowances

What about charging points?

You can install charging facilities and won’t need to treat recharging as a benefit in kind. This means you can recharge your electric vehicle “for free” whilst at work. This tax exemption does not apply if you reimburse the cost of charging away from the workplace, such as at a motorway service station. There are also grants available for installing workplace charging points.

 
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