A company car is recognised as a desirable job perk but what are the advantages and disadvantages of a company car and is it the right option for you?
To help explain how a company car scheme works, Nationwide Vehicle Contracts has put together a short guide laying out the pros and cons of a company car.
A company car is a vehicle provided by an employer for both business and private use. However, to justify the use of a company car, the employee is usually required to travel significantly for their role, such as a regional sales manager.
Historically, company cars tended to be bought in bulk and the keys handed to an employee. Today, most company cars are chosen by the employee from a list of vehicles that have been pre-approved by their employer.
To qualify for a company car scheme, employees usually need to be in a significant or permanent position within the business and have a regular work pattern. Also, once they join the scheme, their wages must not drop below the national minimum wage.
As a company car is considered a privilege that is paid for by your employer, on top of your annual salary, employees who enter a company car scheme must also pay Benefit-In-Kind (BIK) tax. How much tax the employee will pay depends on the vehicle’s market price, income tax band, age of the car, fuel type, CO2 emissions, and engine size.
It's important to note that if your company car scheme includes fuel, you will also need to pay tax on your annual fuel allowance.
If you’re thinking about setting up a company car scheme but don’t know where to start, we have also created this guide to running a company car scheme that you will find useful.
There are plenty of benefits to having a company car, from low BIK tax rates to using the scheme as a recruitment incentive.
As the car is leased through the business, the employee is not personally tied into a financial contract. It is the company's responsibility to make sure the monthly payments are made on time, as well as any maintenance, servicing or MOT obligations.
The employer usually covers insurance, servicing and/or maintenance. Plus, some companies may even have a company car fuel benefit, which will be cheaper than filling up yourself, as your employer will fill up for you and charge you a flat rate like the BIK tax.
Benefit-in-Kind (BIK) tax rates are generally a small percentage of the car's final cost. The total tax you pay will depend on the vehicle's CO2 emissions, fuel type, and income tax rate. Pick an electric or hybrid vehicle and rates are even lower. The BIK rates are 2% for zero-emission cars compared to the 15-37% for petrol and diesel.
If you are a business owner, running a company car scheme is a great incentive to attract and retain staff. A company car is an excellent way to show your employees that you appreciate their hard work and set an example for new employees.
There are plenty of benefits to leasing a company car including avoiding financial burdens such as vehicle depreciation costs.
You could drive away a higher class of vehicle for less money, as there are many discounts to be found with brands such as Audi, Mercedes, BMW with company car leasing. Plus, if you choose an all-electric vehicle like a Tesla, you will pay low BiK tax rates due to electric vehicles producing less carbon dioxide than petrol and diesel vehicles.
Leasing avoids the burdens of vehicle depreciation as you - or your employer - never owns the vehicle. Once the contract has ended, you can order a new lease car or walk away without any of the stress of dealing with selling the car.
Company cars are usually changed every two to four years, which means you'll always be driving one of the latest vehicles on the market. This allows you to benefit from the latest in-vehicle technology and safety features.
There are also some drawbacks to having a company car that you should be aware of before deciding, ranging from company car tax to increased liability.
Every business is different, with some having limitations/restrictions in place that may mean you won't be able to choose the vehicle you want. This is important to some more than others, as it can depend on the line of work you are in. However, if you are a driver who knows what you want, it may lead to you being disappointed with the model selected by your employer.
The amount of company car tax you pay depends on a combination of the cost of the car, the amount of carbon dioxide (CO2) it emits and your salary. So if you are a high earner or drive an expensive car with high CO2 emissions, your BIK tax rates can be costly.
If fuel is included in your company car package, you may have to pay fuel benefit tax. Your employer may fund this tax, but if they don't, you will be taxed accordingly. This is calculated by adding your BIK tax rate by the fixed annual fuel before finally multiplying by your tax margin.
If you leave your current job, the car remains with the employer, which leaves you at risk of being without a car. With a lease agreement, there is no option to purchase the vehicle so you must return the vehicle at the end of the contract.
If you or your employees use their company car for personal use, you are liable for accidents pretty much around the clock. In some cases, it can become costly if you were ever to be involved in an accident, as you would have total liability over the company vehicle.
If you've been fortunate enough to be offered a company car by your employer and want to use it outside of work, you will need to tax the vehicle, this is also known as Benefit In Kind (BIK). A company car is considered a 'perk' that is paid for by your employer on top of your annual salary and has an indirect financial benefit. Therefore you must be taxed by HMRC by the employer completing a P11D form.
The BIK tax rate on a company car is based on a calculation, which takes into consideration the following factors:
The amount of company car tax you'll pay depends on your personal income tax bracket, so if you're a 20% taxpayer, you'll pay 20% of the taxable portion of the car's official price, also known as P11D value. Likewise, if you're a 40% taxpayer, you'll pay 40% on the taxable amount of the P11D value. This amount is usually taken from your monthly pay.
Tax rates on company cars can fluctuate depending on the type of car, vehicle cost, fuel, and efficiency. Take a look at GOV.UK to find out how much your desired vehicle tax may be. Go to the HMRC website, which has valuable information about the implications of using a company car and a handy company car tax calculator that will work out and determine the eligibility for tax. For more information on BIK tax, check out our Company Car Tax guide.
Choosing the right company car for you can be complicated. You want to find a vehicle which is suitable for your work requirements but also looks great. They also need to be comfortable, spacious and have updated tech features for long commutes. Company car tax is a significant factor when deciding on a vehicle too, so it's best to look for one which offers low Benefit-in-Kind (BiK) charge rates to help reduce how much of your salary goes towards your company car.
Diesel vehicles were once considered the best choice for company cars due to the tax benefit in previous years as diesel cars usually have lower CO2 emissions than petrol-powered cars. However, times have changed, and now company car tax favours electrified vehicles over the old fashioned combustion engine cars. Here are some examples of vehicles with low BiK rates, a mix of plug-in hybrids, full hybrids and electric cars.
The Volkswagen ID.3 is an excellent all-electric company car to get. As an electric car, it has a 0% BIK rate for 2020-21, rising to 1% in 2021-22. So the ID.3 is a lot better financially than a petrol or diesel engine car.
The ID.3 now holds ten awards from motoring publications, recently winning the Best Small Hatch' at UK Car of the Year Awards 2021. The ID.3 was praised for its original design, functionality and practicality.
Excellent to drive when commuting to and from work with a modern, roomy interior and excellent boot space of 385 L, perfect for any luggage or business essentials. The ID.3 is also incredibly fast for something that isn't supposed to be a performance car with a 0-62 mph in around 7.3 seconds. In addition, this vehicle has an impressive range of up to 336 miles, ideal for dealing with long motorway trips.
The Volvo XC40 T5 Recharge is a plug-in hybrid version of the Volvo XC40 range. The XC40 is comfortable and relaxing when driving over long distances. However, unlike some plug-in hybrid cars, the boot space hasn't been compromised by the need to package a big battery pack. The XC40 T5 Recharge has an impressive 452 litres of space and 261hp.
If you tow heavy loads for your business, the Volvo XC40 T5 Recharge is a great contender as it was crowned 'Alternatively Fuelled Towcar of the Year' at the 2020 Caravan and Motorhome Club Towcar of the Year.
Plus, the Volvo XC40 T5 Recharge also has low BiK rates of 12% for the 2020/2021 tax year, making it an excellent option for a plug-in hybrid company car.
If you're considering a 4×4 as your next company car, the plug-in hybrid Range Rover Evoque P300e should definitely be considered. The Evoque has 309bhp and 540Nm of torque, enough to get the 4x4 from 0-60mph in 6.1 seconds, as well as reach an impressive 84mph on electric power alone.
Business Motoring awarded the Range Rover Evoque P300e plug-in hybrid range '2021 Best Medium SUV' due to its excellent capability, features and looks. The Evoque P300e is in strong demand among customers looking for a company car with a compelling financial package, fantastic driving experience, hi-tech functions, luxurious cabin, and cutting-edge exterior.
The P300e BiK rate is 6% to 10% for the 2020/2021 tax year, depending on the spec of the car, which isn't the best rate out there however, it's certainly better than driving a combustion engine vehicle.
The e-tron is Audi's first full-electric vehicle which looks like something straight from the future. Along with its electrifying looks, it has a 95kWh battery that gives up to 252 miles of range for commuting.
The Audi e-tron also has plenty of space inside the vehicle along with Audi's impressive high quality and tech interior. As standard, the e-tron comes with a digital dash, MMI Nav Plus, climate control, a 360-degree camera with parking sensors and 20-inch alloys. Plus, the SUV has 660L of boot space, perfect for all sorts of cargo you might need for work.
If you are looking for a company car with comfort, the e-tron is for you as WhatCar? awarded the e-tron the 'Best Large Electric Car' for comfort at the Car of the Year Awards 2021. Finally, the Audi e-tron is also great as your BIK tax bill will be absolutely nothing for 2021/2022 as it's an all-electric vehicle with zero emissions.
The Tesla Model 3 is another brilliant all-electric choice as a company car. The Model 3 is roomy inside and has comfortable seating for five adults thanks to its suspension that soaks up the worst bumps while on the road. The Model 3 also handles well, proving more agile than its hefty weight would suggest around bends. In addition, it has a range of 254 miles plus access to the large Supercharger network around the UK, perfect for customers who are always up and down the motorway.
The interior inside the Tesla Model 3 is unique as it has a single large infotainment touchscreen dominating the sparse dash, which controls most features in the car. The screen is easy to master as it is laid out perfectly for anyone who loves a simplistic interior.
The Tesla Model 3 has also been recognized as an excellent choice for a company car as it was awarded the Auto Express 'Compact Executive Car of the Year' award 2019 and 2020 at the Car of the Year awards. This was mainly due to the government changing its Benefit-in-Kind company car tax rules. The Model 3 also has zero tailpipe emissions and is free from any additional company car tax charges for the 2021/2022 tax year.
If you've been offered a company car, there are many things to think about. It's crucial to weigh both the pros and cons before deciding whether this option is right for you.
Unfortunately, when it comes to deciding whether to take a company car or company car allowance, it's not "one size fits all". This decision is based on your individual circumstances, such as your financial situation, personal needs and other tax liabilities.
A popular company car scheme is salary sacrifice, where an employee gives up part of their gross salary in exchange for a fully insured and maintained new vehicle. With this type of scheme, the employee effectively gets a brand new car at a significantly lower cost than the retail market, as the salary is sacrificed before tax and national insurance contributions are taken. In this case servicing, maintenance and fully comprehensive motor insurance are typically included within the scheme.
It is also essential to take into account your personal circumstances. Such as, if you expect to do a lot of private mileage, it may be a better idea to go with a company car allowance than a company car.
Have a question regarding Business Leasing or want to learn more about company cars? Call Nationwide Vehicle Contracts on 0345 811 9595 to speak to one of our lease specialists.