Having a company car comes with many perks such as not being responsible for repairs or servicing and potentially getting a new car every few years.
But those benefits also come at a cost to you in the form of benefit-in-kind calculations. The tax cost of having a company car can quite often leave you wondering if it is worth having a company car at all.
Stop wondering and start planning as we take you through the pros and cons of having a company car, as well explaining if it’s possible to not pay tax on a company car.
How do I avoid paying tax on a company car? The only way you can avoid paying tax on a company car is by not using it for private journeys. Private usage being prohibited is the only way to avoid a benefit in kind charge on a company car.
Pool cars are not deemed a BIK so there is no tax. You can reduce the BIK on a company car by changing the car you drive such as electric or hybrid models. You could also consider changing the type of vehicle and opting for a van to reduce the cost.
In this guide, we will walk you through the practical, financial and tax considerations of having a company car. You can then make an informed decision about whether it is worth having a company car, or even how you can possibly reduce BIK.
Can you use a company car for personal use?
Yes, you can use a company car for personal use. Make sure there are no stipulations in your employment contract that forbid you from doing so.
You’ll pay tax if you or your family use a company car privately, including for commuting.
You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.
This value of the car is reduced if:
- You have it part-time.
- You pay something towards its cost.
- It has low CO2 emissions.
If your employer pays for fuel you use for personal journeys, you’ll pay tax on this separately.
Company car (no private use declaration)
For a company car to not give rise to a benefit in kind, you must tell your employees not to use the vehicle for private journeys and check they do not.
This is the only way for a company car to be exempt.
It can be more difficult to obtain this exemption than you think.
Even if you are a one-man company with no other employees if you have a van or a car that is never used for private purposes, write a letter from the director of the company (you) to yourself, forbidding you to use the vehicle for private journeys.
I know it is ridiculous, but if you can show that to HMRC you will have protected yourself from their pedantry.
Here is a true story on the matter from Taxinsider of how difficult this can be.
Consider a small husband and wife company that owns a pick-up van. The van is used to move stock around between the company’s several retail outlets and is not used for private purposes. Are they safe from a benefit-in-kind tax charge?
The answer (and the company concerned is a client of my firm) is no. The company was the subject of an ‘employer compliance review’ by HM Revenue and Customs (HMRC), which checks the operation of PAYE on wages and (usually with more focus and aggression) the possible existence of unreported benefits-in-kind.
The HMRC official argued that there was a taxable benefit on the pick-up truck. She eventually accepted (after much tedious study of mileages between the company’s various stores) that there had in fact been no private use, but she pointed out that there was no evidence that private use was ‘prohibited’.
Eventually, I was able to persuade her that my clients had effectively prohibited private use by agreeing no such use should take place – I pointed out that such a prohibition could be achieved by speech as well as by writing, and she reluctantly dropped the point.
This is of course a ridiculous attitude on the part of HMRC, but unfortunately was not an isolated case. HMRC recently took a case to the tax tribunal where the absence of a written prohibition of private use was part of their case. See Holmes v HMRC [2015] UKFTT 0275 (TC).
This behaviour on the part of HMRC is an example of a certain attitude that pervades the department – common sense is overridden by a careful study of the legislation to discover traps for the taxpayer.
It is curiously similar to the ‘aggressive tax avoidance’ they deplore – close study of the legislation can produce unexpected results – unfair reductions in tax for the tax avoiders, and unfair increases in tax for HMRC.
The solution is to have the prohibition on private use set down in writing, perhaps in the form of a letter to any employees who have access to the vehicle concerned.”
Handy Hint: The rules on a director of a business giving a husband or wife a company car.
How does it work if I use a company car but pay for my own fuel?
If you are paying for your own fuel on a company car, you do not have to pay or report on fuel, including for private journeys, if either:
- Employees buy the fuel for their own use.
- You buy it and they pay you back during the tax year, and their payment is equal to or more than the amount you paid.
When you can use the mileage rates
These rates only apply to employees using a company car.
Use the rates when you either:
- Reimburse employees for business travel in their company cars.
- Need employees to repay the cost of fuel used for private travel.
You must not use these rates in any other circumstances.
There will be no fuel benefit charge if you correctly record all private travel mileage and use the correct rate (or higher), to work out how much your employees must repay you for fuel used for private travel.
You will not need to use the advisory rates where you can show that employees cover the full cost of private fuel by repaying at a lower mileage rate.
HMRC review rates quarterly on:
- 1 March
- 1 June
- 1 September
- 1 December
Rates
The advisory electricity rate for fully electric cars is 5 pence per mile.
Hybrid cars are treated as either petrol or diesel cars for advisory fuel rates.
The advisory fuel rates for petrol, LPG and diesel cars are shown in these tables.
From 1 June 2022
| Engine size | Petrol – rate per mile | LPG – rate per mile |
| 1400cc or less | 14p | 9p |
| 1401cc to 2000cc | 17p | 11p |
| Over 2000cc | 25p | 16p |
| Engine size | Diesel – rate per mile |
| 1600cc or less | 13p |
| 1601cc to 2000cc | 16p |
| Over 2000cc | 19p |
Company car rules for Directors
The company car rules for Directors are the same as they are for all other employees. There are no separate rules or exceptions for Directors of limited companies.
You’ll pay tax if you or your family use a company car privately, including for commuting.
You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.
This value of the car is reduced if:
- you have it part-time
- you pay something towards its cost
- it has low CO2 emissions
If your employer pays for fuel you use for personal journeys, you’ll pay tax on this separately.
P11D abolition of the £8,500 threshold
From April 2016 the distinction between ‘higher paid’ employees (including directors) and ‘lower paid’ employees is removed.
- Benefits In Kind provided to all employees will be calculated in accordance with the previous rules for ‘higher paid’ employees and directors and where appropriate will be reportable on forms P11D.
- Forms P9D will no longer exist.
- There are exceptions for ministers of religion and carers.
Using a company car tax calculator
You can work out the value of cars and fuel using online tools from HM Revenue and Customs (HMRC) or your payroll software.
You can work out the value manually on the P11D working sheet 2. Use this method if both of the following apply:
- The car was unavailable for at least 30 consecutive days during the tax year
- You were providing fuel for private use, but stopped doing this
You can use advisory fuel rates to work out mileage costs in some situations, eg if you pay an employee back for fuel they’ve used for business travel.
Handy Hint: The 45p mileage rate has been around since 2011, but there have been moves to increase it.
You have to pay employers’ National Insurance on some motoring costs if they’re considered employee benefits, eg parking permits, drivers, toll bridge fees and congestion charges. You do not pay it on running costs like servicing and insurance.
You can see how much tax you might pay with HMRC’s company car and fuel benefit calculator.
It is not the nicest-looking company car tax calculator you will find but it does the job.
Company van tax loopholes
Whilst not a tax loophole having a company van rather than a company car does potentially bring some interesting tax savings.
A van for tax purposes is defined as a vehicle primarily constructed for the conveyance of goods or the burden of any description. A gross vehicle weight – fully laden – not exceeding 3,500kg.
Double-cab pick-ups and car-derived (kombi) vans add an extra layer of confusion. This is because while you might be using such a vehicle as a van, the additional row of seats means that HMRC may define it as a car.
In order to be classed as a “commercial vehicle” (and qualify for tax reliefs), it needs to have a payload of more than one tonne after seats and have a dedicated load area that is larger than the passenger area.
As an example, a Mitsubishi L200 Warrior would qualify as a van.
As an employer providing company vans and fuel to your employees, you have certain National Insurance and reporting obligations.
You do not have to report or pay anything to HM Revenue and Customs (HMRC) if your van is only used for business journeys or as a pool van.
Business journeys and commuting
A business journey is a trip:
- Made as part of work (such as a service engineer travelling between appointments).
- To a temporary workplace.
Vans used for ‘insignificant’ private journeys are exempt, for example making a slight detour to pick up a newspaper on the way to work.
Pool vans
You will not need to report your van if it’s all of the following:
- Available for use and used by more than 1 employee.
- Available to each employee because they need it to do their job.
- Not ordinarily used by 1 employee to the exclusion of others.
- Not normally kept at or near employees’ homes.
- Used only for business journeys – limited private use is allowed, but only if it’s incidental to a business journey, for example driving home to allow an early start the next morning.
It goes without saying, but if you are looking at tax loopholes, please ensure it’s entirely legal and you seek the advice of an accountant. Whilst it’s not a legal requirement to have an accountant, we advise it.
Work out the value
Vans used for private journeys
You’ll need to report a standard value of £3,600 to HM Revenue and Customs (HMRC). This can be reduced if:
- Your employee cannot use the van for 30 days in a row.
- Your employee pays you to privately use the van.
- Other employees use the van – divide £3,600 by the number of employees.
Van fuel for private journeys
You’ll need to report a standard value of £688 to HMRC. This can be reduced if:
- the employee cannot use the van for 30 days in a row
- your employee pays you back for all their private fuel
- you stopped providing fuel during the tax year
Zero emission vans
You need to report the zero emission van on the P11D at 0% of £3,600 which is £0.
You can see why with the standard value of £3,600 for private journeys and £688 for private fuel why having a company van rather than a company car becomes attractive.
For a 20% tax payer that is just £857.60 per annum in tax to have a vehicle paid for by the business.
If you do low business mileage and high private mileage it would probably be more beneficial to have a van provided you can find something that fits your lifestyle.
FAQs on tax loopholes on company cars
Do you have to pay tax on a company car?
Yes. Your business can provide you with a company car. In paying for the car and associated costs such as fuel, insurance, repairs and servicing the business is providing you with a benefit in kind as you do not have to pay for these costs yourself.
You’ll pay tax if you or your family use a company car privately, including for commuting.
You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.
This value of the car is reduced if:
- you have it part-time
- you pay something towards its cost
- it has low CO2 emissions
If your employer pays for fuel you use for personal journeys, you’ll pay tax on this separately.
The company will need to complete a P11D to report the benefit in kind to HMRC and to pay employers National Insurance on the benefit in kind. Once the form has been processed, HMRC will adjust your tax code so that the tax can be collected through the payroll. You will also need the P11D details for the completion of your Self-Assessment return.
The benefit in kind is calculated based on the type of car you have. This can make a significant difference in your decision-making process. Before making any commitments use the HMRC company car and car fuel benefit calculator to calculate your potential liability. It might help you make the right decision.
How can I reduce the BIK on a company car?
Below we have walked you through various scenarios to help you understand ‘how can I reduce the BIK on a company car?’.
‘Pool’ cars
You do not have to pay or report on ‘pool’ cars. These are cars that are shared by employees for business purposes and normally kept on business premises. A car is not considered to be available for private use if it’s a pooled car, therefore no assessable benefit arises from its use.
You’ll have to pay if a pool car is driven for private use, or if a car is shared by employees and does not qualify as a pool car.
A car only qualifies as a pooled car if all the following conditions are satisfied:
- It’s available to, and used by, more than one employee.
- It’s made available, in the case of each of those employees, by reason of their employment.
- It is not ordinarily used by one of them to the exclusion of the others.
- Any private use by an employee is merely incidental to their business use of it.
- It is not normally kept overnight on or near the residence of any of the employees unless it’s kept on premises occupied by the provider of the car.
If a car fails any of these conditions it might be regarded as shared car or van.
Employers need to be able to demonstrate that the conditions for the car or van to be a pool vehicle have been met, for instance by keeping mileage records to show when the car was used, by whom and for what journeys.
These conditions can be particularly onerous and if you are the only driver of the car this will not be right for you.
What else…….
The most effective way to reduce the BIK on a company car is to run an electric or hybrid car. The BIK is calculated on the car’s CO2 emissions so having a cleaner car will dramatically cut your tax bill whilst being better for the environment.
Drive an electric car
For fully electric cars, the BIK rate is just 2% during the 2022/23 tax year and will remain at that level for another two tax years until 2024/25. This makes driving an electric car favourable to driving a petrol car from a BIK point of view.
Other considerations will be charging and purchase costs.
This example does not take into account private fuel so the differential would be even higher, but you get the point.
| Vehicle | Tesla Model S Performance | Mercedes S-Class Saloon |
| P11D value | £94,990 | £82,965 |
| Emissions | 0g CO2 | 173g CO2 |
| 2022-23 monthly BIK cost @ 40% tax rate | £63 per month | £1,023 per month |
| 2023-24 monthly BIK cost @ 40% tax rate | £63 per month | £1,023 per month |
| 2024-25 monthly BIK cost @ 40% tax rate | £63 per month | £1,023 per month |
Drive a hybrid
If your company car has CO2 emissions of 1 to 50g/km, the value of the car is based on its zero-emission mileage figure or ‘electric range’. This is the distance the car can go on electric power before its batteries need recharging.
This puts driving a hybrid firmly in the same bracket for savings as an electric car and much better than a petrol or diesel car.
Drive a van
Check out the company van tax loophole section above where we have walked you through how having a company van instead of a car could cost just £857.60 in tax for the year.
Drive a different type of vehicle
Yes, you can buy several types of vehicles through your business. You could buy a car, motorcycle, van, truck, and lorries. The tax rates and reliefs for each can differ so make sure you understand the rules before making a commitment to buy.
Where a specific chapter of the benefits code does not apply the vehicle with be treated as ‘all other assets’. Cars and vans have their own benefits code.
The term asset is a general term used for things like a motorcycle, laptop, clothing, fridge, quad bike, yacht, plane, land, cars, and house.
For ‘all other assets’ the taxable benefit in kind is 20 per cent of the market value at the time it was first used as a benefit.
For example, the benefit-in-kind value of a motorcycle is calculated as 20% of the total cost (including VAT) of the motorbike. This can be a big improvement on the BIK on a company car.
Get a newer company car
The HMRC benefit in kind calculations uses the CO2 emissions in the formula for working out how much it costs an employee to have the company car.
Newer cars have lower CO2 emissions as the government has made dirty cars less desirable as they try to meet their carbon emissions targets. Buying a second-hand car to save money might end up costing more eventually.
Is it worth having a company car?
There are various considerations when contemplating having a company car. Some of the key items to think about:
- Will I lose my insurance no claims bonus?
- How much personal tax will I pay?
- Is it better to buy a business car or lease a business car? (here’s how the VAT works)
- Who handles the running costs of a business car?
- Is it better to claim mileage or fuel?
- Would it be better to get a car allowance.
This is not an exhaustive list, but you get the idea. There is a lot more to having a car for your business than simply deciding on the make, model, and colour.
So, it all depends. Not the answer you were probably looking for but unfortunately, it depends on several variables and relates to both your personal and business situation. The outcome can be completely different for two people even if they were buying the exact same car.
As we have shown in this article there are several things to consider. Our recommendation would be to speak with your accountant or bookkeeper and work through various scenarios.
Something as simple as switching one car for another in your calculations could change your mind. The CO2 emissions of the vehicle are one of the key drivers of the overall costs to you when factoring in the benefit in kind.
It is not enough to simply consider the tax savings for the business of buying a car through the company but to combine the overall result with the tax that will be paid personally and the national insurance charge the business will pay for providing you with a company car.
Something to consider is the number of business miles you will be completing. Would you be better off paying for your own fuel and avoiding the benefit in kind charge for fuel?
What cars are exempt from company car tax?
There are no company cars that are exempt from tax. The only way to not incur a benefit in kind tax charge is to not use the company for private usage or to try and limit the costs by opting for an electric or hybrid car to minimise the charge.
You could also consider using another type of vehicle such as a van or motorcycle which has much more favourable tax treatment for the individual.
Do I have to pay company car tax if I don’t use it for personal use?
A company car is considered a non-cash benefit to an employee. You must pay tax on it if your employer allows you to use it privately as well as for business purposes.
If you have a company car and you want to use it for personal trips then yes, you do have to pay company car tax.
However, there is no company car tax charge where the use of the vehicle is prohibited and is not in fact used privately.
For a company car to not give rise to a benefit in kind, you must tell your employees not to use the vehicle for private journeys and check they do not.
This is the only way for a company car to be exempt.
It can be more difficult to obtain this exemption than you think.
Even if you are a one-man company with no other employees if you have a van or a car that is never used for private purposes, write a letter from the director of the company (you) to yourself, forbidding you to use the vehicle for private journeys.
I know it is ridiculous, but if you can show that to HMRC you will have protected yourself from their pedantry.
Conclusion
Paying tax on a company car is a complex area. Having a company car that allows for private usage gives rise to a benefit in kind arising and for that privilege, we must pay tax.
The type of vehicle you drive and even the type of fuel all has an impact on the value of the benefit on which you pay tax. Reviewing the type of vehicle, you drive and considering other options can make a significant impact on the tax you have to pay.
During this guide, on how to avoid paying tax on a company car we have given you the facts and tools needed to find a vehicle that works for your budget. All that is left is for you to run some different scenarios and find the one that works for you.
You might also like…
- The ultimate guide to buying a car through your business
- The rules on having to pay 45p per mile
- Here are your obligations as a business director
Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
