Are you a business owner or an employee who has been provided with a company car as a benefit in kind? If so, you may be wondering about the advantages and potential pitfalls of this arrangement. Look no further! In this article, we will explore the ins and outs of benefits in kind and company cars.
What are benefits in kind?
Benefits in kind are non-cash perks or rewards that employees receive from their employers. These can include anything from private healthcare and gym memberships to company cars. While these benefits are not paid directly in cash, they still have value and are subject to taxation.
When it comes to company cars, employees are given the privilege of using a vehicle provided by their employer for both business and personal use. This perk is often seen as a valuable addition to an employee’s compensation package, as it offers convenience, prestige, and financial benefits.
Benefits in kind and company cars
Company cars are a popular perk provided by employers to their staff members. They offer convenience, prestige, and financial benefits, but they also come with certain tax implications and administrative obligations.
Understanding the tax implications of having a company car is crucial for both employers and employees. The value of the benefit in kind is determined by factors such as the car’s list price, CO2 emissions, fuel type, and the employee’s personal tax bracket. The taxable value of the benefit is then used to calculate the amount of tax that needs to be paid.
In addition to the tax implications, there are also administrative obligations associated with company cars. Employers must keep detailed records of the car’s usage, including the purpose of each trip, the mileage covered, and any expenses incurred. These records are necessary for reporting purposes and to ensure compliance with tax regulations.
Tax implications of company cars as a benefit in kind
Calculating the tax payable on a company car requires a thorough understanding of the rules and regulations set by HM Revenue and Customs (HMRC). The taxable value of the benefit is determined by several factors, including the car’s list price, CO2 emissions, and fuel type.
The list price of the car is used as a starting point for calculating the taxable value. This is the price of the car when it was first registered, including any optional extras. The CO2 emissions and fuel type are taken into account to determine the appropriate percentage of the list price that is subject to tax.
Employees are then required to pay income tax on the taxable value of the benefit. The amount of tax payable depends on their personal tax bracket. In addition to income tax, both the employer and the employee may need to pay National Insurance contributions on the value of the benefit.
Calculating the value of a company car for tax purposes
Calculating the value of a company car for tax purposes can be a complex process. As mentioned earlier, the list price of the car is used as a starting point. However, this value may be reduced if the car is not available for the full tax year or if it is used for business purposes only.
To calculate the taxable value, a percentage is applied to the list price based on the car’s CO2 emissions. The percentage ranges from 0% for zero-emission vehicles to a maximum of 37% for high-emission vehicles. This percentage is then multiplied by the employee’s personal tax rate to determine the amount of tax payable.
It’s worth noting that the taxable value of the benefit can change each year as the government adjusts the tax bands and emission thresholds. Employees should be aware of these changes and consult with a tax professional to ensure they are paying the correct amount of tax.
Benefits in kind vs cash allowance for company cars
When it comes to providing company cars as benefits in kind, employers have another option: offering a cash allowance instead. This allows employees to use the money to lease or purchase their own vehicle, rather than being provided with a company car.
There are advantages and disadvantages to both options. A company car provides the convenience of having a vehicle readily available for both business and personal use. It also offers the prestige associated with driving a company-branded vehicle. Additionally, the employer takes care of all the associated costs, such as maintenance, insurance, and fuel.
On the other hand, a cash allowance gives employees more flexibility and freedom of choice. They can choose a vehicle that suits their personal preferences and needs, rather than being limited to the options provided by the employer. However, employees are responsible for all the costs associated with owning and maintaining the vehicle.
Benefits in kind and company cars – employee perspective
From an employee’s perspective, having a company car as a benefit in kind can be highly advantageous. It eliminates the need to purchase or lease a vehicle, saving them the upfront costs and ongoing expenses. It also provides access to a higher standard of vehicle than they may be able to afford on their own.
Company cars also offer convenience, as employees do not need to worry about finding parking spaces or arranging alternative transportation. They can use the car for both business and personal use, making it a versatile and valuable perk.
However, employees should be aware of the tax implications associated with having a company car. The taxable value of the benefit is added to their overall income, which may push them into a higher tax bracket and result in a higher tax bill. It’s important for employees to understand the potential impact on their take-home pay and budget accordingly.
Benefits in kind and company cars – employer perspective
From an employer’s perspective, providing company cars as benefits in kind can be a strategic move to attract and retain talented employees. It can enhance the overall benefits package and make the company more competitive in the job market.
Company cars also offer branding opportunities, as they can be branded with the company logo or colours. This increases brand visibility and promotes a sense of professionalism and credibility.
However, employers should be aware of the administrative obligations and costs associated with providing company cars. They are responsible for ensuring the cars are properly insured and maintained. They must also keep detailed records of the car’s usage and expenses for tax reporting purposes.
Additionally, employers should consider the tax implications for both themselves and their employees. The National Insurance contributions payable on the value of the benefit can be significant, especially for higher-value cars. Employers should factor these costs into their budget and make informed decisions about offering company cars as benefits in kind.
The Advantages of Electric Company Cars to Hybrid or Traditional Fuel Cars for Tax Purposes.
When it comes to tax purposes, there are clear advantages to choosing electric company cars over hybrid or traditional fuel cars. One of the main benefits is the tax incentives that are offered for owning and operating electric vehicles. Governments around the world are encouraging the use of electric vehicles by providing tax credits or deductions for businesses that purchase them. These incentives can significantly reduce the overall tax liability of a company, making electric cars a more financially advantageous option.
Another advantage of electric company cars for tax purposes is the ability to claim a higher percentage of the cost as a deductible expense. In the UK, businesses can claim a higher percentage of the purchase price or lease payments for electric vehicles compared to hybrid or traditional fuel cars. This means that companies can potentially save more money on their taxes by choosing electric cars for their fleet.
In addition to tax incentives, electric company cars can also offer long-term savings in terms of fuel costs. Electric vehicles are much more fuel-efficient compared to their hybrid or traditional fuel counterparts. This means that companies can save a significant amount of money on fuel expenses over time. With rising fuel prices, this can have a substantial impact on a company’s bottom line.
Furthermore, electric company cars can also provide businesses with a positive public image. Companies that prioritise sustainability and reduce their carbon footprint are often seen in a favourable light. By choosing electric vehicles for their fleet, companies can demonstrate their commitment to sustainability, which can enhance their reputation and attract environmentally-conscious customers.
Advantages and disadvantages of providing company cars as benefits in kind
Providing company cars as benefits in kind offers several advantages for both employers and employees. For employers, it can enhance their benefits package, attract top talent, and promote their brand. For employees, it provides convenience, prestige, and financial benefits.
However, there are also disadvantages to consider. For employers, the administrative obligations and costs associated with providing company cars can be burdensome. For employees, the tax implications and potential impact on take-home pay should be carefully evaluated.
Ultimately, the decision to provide company cars as benefits in kind should be based on the specific needs and objectives of the company and its employees. Employers should consider alternatives and weigh the pros and cons before making a final decision.
Other popular benefits in kind
While company cars are a popular choice, there are alternatives that employers can consider when it comes to providing benefits in kind.
Employers can also explore other non-cash benefits, such as private healthcare, gym memberships, or flexible working arrangements. These benefits can be highly valued by employees and may be more cost-effective for employers.
In conclusion, benefits in kind and company cars can offer numerous advantages for both employers and employees. They provide convenience, prestige, and financial benefits. They often help with making a job more attractive to potential new employees, and benefits in kind are often expected in some form or another. However, it’s crucial to understand the tax implications and administrative obligations that are associated with company cars in particular.
Employers should carefully consider the costs and benefits of providing company cars as benefits in kind, and explore alternatives that may better suit their needs and budget. On the flip side, employees should be aware of the potential impact on their take-home pay and seek professional advice if needed.
Overall, benefits in kind and company cars can be valuable perks that enhance the overall compensation package and contribute to a positive employer-employee relationship. By understanding the ins and outs of this arrangement, both employers and employees can make informed decisions that align with their goals and objectives.
Jason Cannon
Managing Director and Figures UK Founder
No matter the size of your business, whether you’re a sole trader or a Limited company, when it comes to accounting, it can be a little confusing to say the least.
That’s where we come in. We’re on hand to listen, advise and provide our expert support.
You can find lots more useful information in our blogs below or get in contact with us.
