Providing an employee with a company car as part of their remuneration package has, in recent years, become a much more attractive benefit. The tax payable by employees for car benefits has significantly reduced for electric or low emission cars and is set to remain at low rates for the next few years.
Tax implications for the employer
If the vehicle is purchased outright or under hire purchase, the employer can enjoy 100% first year capital allowances for new electric cars or cars with zero emissions. This is compared to capital allowance rates of 18% or 6% for higher emission or second-hand cars.
Where the vehicle is leased, the full cost of rental payments will be deductible for cars with CO2 emissions of less than 50g/km. For cars with higher emissions, a 15% disallowance of the lease rental payment will be applied. The employer will be required to pay class 1A NICs at 13.8% (15.05% from April 2022) on the value of the car benefit to the employee. This cost is deductible for tax purposes.
Tax implications for the employee
The provision of a company car is taxable as a benefit in kind on the employee and subject to income tax at the appropriate rate.
The benefit value is calculated by taking the list price of the car and multiplying this by the appropriate benefit percentage. The relevant percentage is based on the car’s CO2 emissions and electric range (where applicable) and is capped at 37% for the highest emission cars. For zero emission cars this is set at just 1% of the list price of the car in 2021/22 and 2% for 2022/23. It has been confirmed that these rates are set to be frozen until at least 5 April 2025.
As an example, the income tax charge for a higher rate taxpayer with an electric company car that has a list price of £30,000 would be just £120 in 2021/22. This is in comparison to an income tax liability of £4,400 for a company car with the same list price but CO2 emissions exceeding 160g/km.
Further tax savings for both the employer and employee can also be enjoyed where the employee enters into a salary sacrifice arrangement for a low emission car (less than 75 g/km). We would recommend that professional advice is sought in advance of entering into such an arrangement as there are several conditions to be satisfied for a salary sacrifice arrangement to be effective, as well as a requirement to
update the terms of an employee’s employment contract.
For further details on car salary sacrifice arrangements, read our article Salary sacrifice and electric company cars here.
Other considerations
There is no fuel benefit for pure electric cars and an employer can pay an employee up to 10p per business mile (as of 1 September 2023) for the cost of electricity without any tax implications. For up to date advisory fuel rates please click here.
Further, the provision of a charging point at the workplace and the company car user’s home does not give rise to a taxable benefit.