Different ways you’ll be taxed on cars for work

Finding out the different ways you’ll be taxed on using a car for work is one of the most frequently asked questions we get, especially from those who are a director of their own limited company or employees who are presented with different car options from their employer. It is perhaps such a popular question because of the many available options and how each results in different tax treatments for both the business and the potential individual using the car. This article will explain the different ways you’ll be taxed on different types of cars you can use for work.

How you’ll be taxed when using a personal car for work

You will not usually be taxed when using your own personal car for work. In fact, although it may seem like there is no benefit, it is nevertheless often recommended as the most straightforward way of using a car for work. Whilst there’s no tax relief available when buying your own personal car, and you’ll be personally financially responsible for the payment of the car, insurance, tax, maintenance and fuel, you’ll nonetheless own the asset yourself, allowing you to use it to travel wherever you wish and keep it even if you change jobs.

However, when you use your own personal car for work purposes, you’ll be entitled to claim the cost of fuel from your employer for the miles travelled. Be aware that the definition of “work purposes” excludes your daily commute from your home to your usual place of work. On the other hand, it does include going to different work locations where you are not usually based, for example if you were visiting another office branch, meeting with clients, or making work deliveries or collections. HMRC stipulates a fixed rate for reimbursement when you use your own personal car for work travel that will not be subject to income tax. This amount is 0.45p per mile up to the first 10,000 business miles in any given tax year, after which 0.25p per mile is allowable for every mile over this threshold without incurring income tax.

If, however, your employer pays you any amount over this fixed rate, the amount in excess will be subject to income tax at your own personal income tax rate and National Insurance (NI) because it will be seen as income. For example, your employer may have a policy whereby they pay you 0.75p per mile to account for your time spent travelling or for any wear and tear to your own personal vehicle. In this case, 0.30p for every mile will be subject to your personal income tax rate and NI (or 0.50p if you have travelled over 10,000 miles).

For limited company directors, you can apply the same rules above when using your own personal car to travel for business purposes. Our advice is to be sure you keep accurate records of mileage.

Advantages of using your own personal car for work

• You own the car yourself so can take it with you even if you change jobs
• You can use the car for personal travel as well as business travel
• There’s no income tax or NI to pay when using your personal car unless your employer pays you over the HMRC fuel allowance rates

Disadvantages of using your own personal car for work

• There’s no tax relief when buying a car personally
• You cannot reclaim any VAT paid on a car you have purchased personally
• You are responsible for all running and maintenance costs of your car

How you’ll be taxed on a company car allowance scheme

Company car allowance schemes are generous incentives whereby the employer pays a lump sum in addition to your annual salary so that you can get a car for work. They are highly desirable because you are free to decide how to use the money however you wish. You can choose to buy a car outright or enter into a lease hire agreement, you can choose whatever car you wish, you are free to use the car for personal use, and you do not have to return the car when you leave your job. In addition, depending on each company’s individual policy, they may well also pay your mileage allowance for work travel as well.

If you are lucky enough to receive a company car allowance, then you should be aware that money received will be seen as income and so you will be taxed at your personal income tax rate as well be subject to NI. What’s more, bear in mind that this additional sum may push you into higher tax brackets so you could become liable to pay higher rates of tax. Other considerations you should make are that, although you’ll receive an allowance, it may not necessarily cover all expenses associated with running a car; for example, if there are repairs so you may end up needing to pay for the car with your own personal finances as well.

Employers who are considering offering a company car allowance may be asking how much is the average car allowance or what is a reasonable amount for a car allowance? The good news is that the amount offer is completely discretionary, but usually it’ll be the equivalent of how much it would cost the company to offer a company car. Offering a company car allowance is a powerful incentive to attract and retain key employees, is a very flexible scheme to administer where you can offer it to select employees only, and so long as you have laid out your terms and conditions clearly in the policy, you’ll be able to remove an employee’s allowance as well. However, it is important to be aware that offering a car allowance will be subject to employer’s NI. If you are running your business as a limited company, the car allowance paid to your employees is an allowable business cost that reduces business profits for corporation tax purposes.

For directors of their own limited company, there is little need to operate a car allowance scheme if you would like the company to pay for your car in this way as it would simply be more administrative work. Instead, simply pay yourself a higher director’s salary because the money from the car allowance scheme will be taxed in the same way. The taxes that would be due would include employer’s NI from the business, and employee’s NI and income tax from you personally.

Advantages of a company car allowance

• The employee receives a budget in addition to their normal wages which they can do with as they wish, and this is often seen as a significant workplace benefit
• The employee is able to keep the car even if they change jobs
• The employee can use the car for personal travel as well as business travel
• The company offering the car allowance can benefit by reducing their profits and therefore corporation tax

Disadvantages of a company car allowance

• There is no tax relief for the employee who receives the car allowance
• The employee will be liable for income tax and NI on the additional amount they receive as part of their car allowance which can push them into higher tax brackets
• The car allowance may not be enough to cover all costs associated with running a car such as for insurance or repairs
• Employers offering the car allowance will be subject to paying employer’s NI on the additional amount offered as a car allowance

How you’ll be taxed on using a company car

At first glance, being offered a company car may appear to be a great way to get a car for work as your employer provides you with a vehicle to use for both work purposes as well as personal use as well. However, as with many workplace benefits which are known as benefits-in-kind (BIK), they are often subject to income tax. Depending on the vehicle on offer, it could lead to hefty additional taxes due to be paid by you personally.

A company car only attracts income tax when there has been personal use by the employee but remember that even commuting to and from work counts as personal use. How much you’ll be taxed depends on a number of different factors including:

• The CO2 emissions of the car (diesel cars incur a 4% surcharge)
• The price of the car
• How many days in the year the car is available to you
• Your personal income tax bracket

To calculate how much you’ll be taxed on a company car, you can use the following formula:

Price of the car x rate based on emissions x days in the year the car is available to you x your personal income tax bracket

As an example, to illustrate:

The price of your company car is £47,000 and its CO2 emissions are 120 grams per km. For the 2023/24 tax year the rate of tax based on emissions is 29%. Say for the example that the car has only been available to you for 100 days out of the year and your personal income tax bracket is the basic rate of 20%.

The calculation would therefore be £47,000 x 29% = £13,630. Next multiply this by 27% (100 days is 27% of the year) which is £3,680.10. Finally, multiply this figure by 20% (your income tax rate) = £736.02. £736.02 is the amount of BIK-tax you would need to pay for the use of a company car.

Alternatively, you can also use HMRC company car tax calculator. You’ll notice that the lower the car’s emissions, the lower rate of tax is due to be paid. For that reason, electric and hybrid vehicles are often a popular choice for company cars to reduce the employee’s tax liability.

Don’t forget however, that this calculation is only for the use of a company car for 100 days out of the year. The BIK-tax would be significantly more were you to have a company car for a whole year, as well as if you were in the higher or additional rate income tax bands. For this reason, it is often seen as better value to use your own personal car vs a company car, even if you are a director of your own limited company looking to purchase a car through the business.

Furthermore, if the company pays for the company’s car fuel which you’re entitled to use for personal travel then this will be treated as a separate BIK and incur its own BIK-tax. To calculate how much you will pay in fuel BIK-tax you will need to know the vehicle’s emissions and it’s BIK rate, the car fuel benefit charge multiplier which is a set amount set by HMRC each year and your personal income tax band.

The formula to calculate fuel-BIK tax is: car BIK rate x car fuel benefit charge multiplier x personal income tax band.

If we use the same vehicle as the example above, then we know the car BIK rate is 29%. Multiply by the 2023/24 car fuel benefit charge multiplier which is currently £27,800 and then multiply by the 20% basic income tax rate. This equals £1612.40 which needs to be paid BIK-tax.

Advantages of using a company car

• A new car is provided for you for work travel as well as available for personal use which often does not require you to use your own personal finances
• Costs associated with running a car such as tax and insurance are covered by the company

Disadvantages of using a company car

• You do not own the vehicle so will have to return it if you decide to change jobs
• You will be required to pay BIK-tax which can be substantial depending on the type of vehicle and your personal income tax band

How you’ll be taxed on using a company pool car

A company pool car is distinctly different from a company car by definition as well as how it is treated for tax purposes. Unlike using a company car, using a pool car does not attract BIK tax because one of the requirements which qualifies the car as a pool car is that there can be no personal use by the employee or director.

If you have access to a pool car to travel for work purposes, you incur no taxes. It also means you do not own the vehicle or have access to it for personal use. However, it is a convenient and affordable option where you need to regularly travel for work.

The onus on ensuring that a car qualifies as a pool car is usually on the company. To establish this, you’ll often find that the company will have strict policies in place such as:

• The pool car can be booked by multiple employees and cannot be exclusively reserved for your own use
• The pool car should be kept at the business premises overnight unless there are exceptional circumstances and you have been granted permission to park the car at your own residence
• You may be required to keep a mileage log with details of your work journeys

If you are a director of your own limited company and have no other directors or employees, it is unlikely that a car purchased through the company will qualify as a pool car. Even where you can demonstrate that you have your own personal vehicle that you use and keep the pool car at a business workplace that is not your own home, HMRC are unlikely to see the car as a pool car as there are no other employees that will share it.

Advantages of using a company pool car

• There is no cost to you personally in financing the car or any of the associated costs
• There is no tax to pay at all when using a company pool car
• There is no impact to your own personal vehicle for work travel when a company pool car is available to you

Disadvantages of using a company pool car

• You cannot use the company pool car for personal travel
• You won’t have access to the company pool car if you change jobs
• You will have to share the company pool car with others and have little choice in what the car is

We hope you have found this article to be a comprehensive summary on the different ways you can be taxed when using a car for work. For more informative guides, please bookmark our Tax Guides or subscribe to our monthly email newsletter.