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Get startedPros and cons of a company car: Employee guide
Organisations often offer a company car as part of their employee benefit schemes. This could also be the case for roles, which involve a fair amount of commuting to various locations for business purposes.
A company car can be a great work benefit to have as an employee. However, it's crucial to consider your individual circumstances and pros and cons before deciding if a company car is worth it for you.
In this guide, we'll go through the different company car schemes your employer may offer, how to qualify, and what advantages and disadvantages come with acquiring a company vehicle. We've included some information about paying tax on your company car, but if you want to dive straight into company car tax, this article might be a better place to start.
This guide is for employees - if you're an employer, consider reading our employer guide on company cars vs car allowance.
Company car guidelines
Employees can qualify for a company car based on the company guidelines. Roles typically eligible for a company car are those that require a significant amount of business trips like Area Managers, Regional Managers, Account Managers etc., but not limited to these roles alone.
HMRC company car guidelines stipulate that for employees to be eligible or continue being eligible for a company car scheme, their wages must not drop below the national minimum wage, which stands at £11.44 per hour from April 2024.
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Get started for free Get started for freeCompany car schemes and how to qualify
There are 3 main company car schemes that employers can offer. Employers could choose to offer all, or a selection of the below options.
Company fleet scheme
In this instance, a company buys a fleet of cars which any qualifying employee can choose from. The company normally bears the cost of the vehicle's general upkeep (insurance, road tax, and maintenance). Companies with a fleet containing company cars that have a lower overall benefit in kind rate (such as plug-in hybrid and electric cars) may be attractive to you as an employee.
Car allowance
With car allowance, the employee is given a cash allowance as part of their pay package, which is taxed as part of their income tax. This is a popular option for companies that want to reduce the overall administrative overhead of running a company car scheme.
This option puts you in full control as the employee, since you decide what car to choose.
Salary sacrifice
Employees that choose salary sacrifice can lease a car from the company’s list of approved partners and pay the applicable monthly premium from their gross salary. As an employee, this can be an attractive benefit to you as it provides the opportunity to lease a new car in a tax-effective way (you incur a lower tax and National Insurance bill).
Pros of company cars
Lower cost to the employee
If you opt into the company fleet scheme, the regular upkeep of the company car is included so the employee does not incur the costs of service, tax, insurance, or maintenance.
Reduced tax costs
If you opt into a salary sacrifice scheme for your company car, you can benefit from reduced National Insurance contributions. Benefit in kind (BiK) rates are also much lower, starting at just 2% for zero emissions cars.
Reduced paperwork
Since the car allowance is taxed as part of the employee's gross salary, there is very little to no additional paperwork required, which removes the need to calculate further company car tax.
Cons of company cars
Restricted vehicle choice
Employees will be restricted to a range of cars if the employer only offers a company fleet scheme. The cars in this range may not be suitable for the employee's private use.
Rule changes to the salary sacrifice scheme also mean that employees are restricted to plug in hybrids or full electric cars to maximise the overall benefit of opting in to this scheme.
Responsibility of maintenance
With the car allowance scheme, the employee is responsible for the overall upkeep of the vehicle. This includes road tax, insurance, maintenance cost, and any necessary repairs.
When is tax payable on company cars
How much tax you'll pay on your company car will depend on the company car scheme you opt into.
Company fleet scheme
Employees who are enrolled onto the company fleet scheme pay benefit in kind (BiK) tax. This is calculated using the value of your car and CO2 emissions.
Car allowance scheme
You do not pay company car tax on this scheme, as the car allowance is taxed as part of your income tax rate. The car allowance is seen as additional income and is taxed according to your tax bracket rate for income tax and National Insurance contribution.
Salary sacrifice
The CO2 emissions of the company car chosen (if below or above 75g/km) determine what tax you pay. The tax options will either be to pay benefit in kind tax (BiK) or income tax on the amount of salary sacrifice (whichever is higher).
Other factors that can impact how much tax you pay on your company car include:
- Whether you use your company car for personal use, including for commuting
- Whether you have your company car part time
- If your company car has low CO2 emissions
Working out your company car tax
To work out your company car tax, you need to know the benefit in kind car tax rate, which is a product of the P11D value of the car, BiK banding of the car, and your income tax rate. You can find a detailed guide to calculating you company car tax here.
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