Complete Guide to Company Cars for Business Owners
Updated: We originally published this guide on Company Cars on 3 July 2017 and updated it on 20 February 2025 to ensure the information remains accurate and comprehensive.
Choosing the right company car can be a significant decision for a business owner. Not only does it impact your company’s financials, but it also affects your tax liabilities, running costs, and employee benefits. Whether you’re buying a car for yourself, your team, or looking to provide an attractive perk for employees, understanding the full range of tax implications and financial benefits is crucial. In this guide, we’ll walk you through everything you need to know about company cars, from tax considerations to financing options and how to maximise tax relief.
Key Tax Considerations for Company Cars
When purchasing or leasing a company car, there are several important tax considerations to keep in mind. These include Benefit-in-Kind (BIK) tax, corporation tax relief, writing down allowances, and VAT reclaims.
Benefit-in-Kind (BIK) Tax
BIK tax is paid on company cars that are provided for personal use. The amount you pay depends on several factors, including the car’s value, emissions, and personal use.
For the 2024/25 tax year, electric cars benefit from a reduced BIK rate of just 2% of the value of the vehicle when new, making them an attractive option for business owners looking to save on tax. However, this is due to increase incrementally from 3% in 2025/26 to 9% by 2029/30.
Cars with higher CO2 emissions will attract a higher BIK rate, so opting for an electric or low-emission vehicle could save both you and your employees money.
Corporation Tax Relief
The good news is that your business can claim corporation tax relief on the cost of purchasing a company car. However, the tax treatment varies depending on whether the car is new or used.
- New Cars: If you purchase a brand-new electric car, you can claim 100% First-Year Allowance (FYA), allowing you to deduct the full purchase price from your company’s taxable profits in the year of purchase.
- Used Cars: If the car is second-hand, you can claim writing down allowances (WDA) of 18% per year on the reducing balance of the car’s value.
Writing Down Allowance (WDA)
For used cars, your business can claim tax relief by writing down the value of the car over time. The WDA for a car is either 6% or 18% per year (depending on CO2 emissions) on the reducing balance, so the car’s tax value decreases as you continue to claim relief. This differs significantly from the immediate 100% tax relief for a new car.
VAT Reclaim
You can reclaim VAT on the purchase of a company car if you use it exclusively for business purposes or specific purposes. However, if you use the car for personal use, you cannot reclaim VAT.
Financing Your Company Car
When it comes to financing a company car, there are several options available. The most common are Personal Contract Purchase (PCP) and Hire Purchase (HP). Understanding these options’ financial and tax implications is crucial for making the best decision.
PCP vs. HP
Both PCP and HP are popular ways for businesses to finance a company car, and the tax treatment is largely the same for both.
- PCP: With a PCP agreement, your business typically pays a deposit followed by lower monthly payments for the duration of the contract. At the end of the term, your business has the option to pay a lump sum to own the car or return it. The advantage of PCP is the flexibility at the end of the contract.
- HP: HP agreements involve higher monthly payments, but your business owns the car outright at the end of the term.
Leasing vs. Buying
When deciding whether to lease or buy a car, consider both the short- and long-term financial impact. Leasing usually involves lower monthly payments and offers flexibility, as you can return the car at the end of the contract. However, buying a car may offer greater financial benefits over time, especially if the car has a long lifespan or is essential for your business. Even with both business and private use, leasing may allow for some VAT recovery.
Running and Maintaining Company Cars
Along with the initial cost of purchasing or leasing a company car, you must also consider ongoing running costs, including maintenance, repairs, insurance, and fuel.
Tax Deductibility of Running Costs
The good news is that most running costs for company cars are tax-deductible, including:
- Fuel: If you use your company car for business purposes, you can fully deduct fuel costs. However, if you use the car for personal purposes, the fuel benefit in kind will be taxable income for the employee.
- Insurance: You can deduct insurance costs as a business expense, provided the car is used for business purposes.
- Maintenance and Repairs: You can claim maintenance and repair costs as business expenses if they are directly related to the car’s business use.
Electric Vehicle Charging Infrastructure
If you opt for an electric vehicle (EV), your business can also cover the cost of installing an EV charging point at the office or home (if used primarily for business). This is tax-deductible and could be an excellent benefit for both your business and employees who use EVs.
Environmental and Employee Benefits
Offering company cars, particularly electric vehicles, can significantly benefit your business and your employees.
Why Choose Electric?
Electric vehicles (EVs) are becoming increasingly popular due to their lower running costs, reduced environmental impact, and tax advantages. Your business could benefit from generous tax incentives and improve its sustainability credentials by opting for EVs.
Employee Benefits
Company cars offer employees a significant perk, providing convenience and potential tax efficiency. They can be structured to benefit both the business and the employee, especially if the car is electric or low-emission. Employees may find company cars more tax-efficient than a salary increase. A salary sacrifice scheme can also reduce employees’ taxable income while providing them with a new car.
Common FAQs About Company Cars
How is the BIK tax calculated for company cars?
The tax authorities calculate BIK tax based on the car’s list price, CO2 emissions, and the amount of personal use. For electric cars, the BIK rate is currently 2% for the 2024/25 tax year. However, this is due to increase incrementally from 3% in 2025/26 to 9% by 2029/30.
Can I claim VAT on a second-hand vehicle?
You can reclaim VAT on second-hand vehicles only if you purchase them under the Margin Scheme (from a VAT-registered business) or use the vehicle solely for business purposes.
What happens if I use the car for both personal and business use?
If you use the company car for both personal and business purposes, you will be subject to Benefit-in-Kind tax.
Conclusion: Making the Right Decision for Your Business
Choosing the right company car is not just about the initial cost – it’s about understanding the long-term financial and tax implications. By considering the tax benefits, financing options, and running costs, you can make an informed decision that benefits both your business and your employees.
At Green & Co, we specialise in providing tailored tax advice for businesses, ensuring that you get the most out of your company car while staying compliant with tax regulations. For more information or to discuss your options further, Contact Us today.
