A company car is just a car that a company pays for but an individual uses. The idea has been around for decades and it’s essentially a way for a business to give a staff member and extra perk on top of their base salary.
Unfortunately, what was a straightforward system has gotten pretty convoluted as HMRC looks to crack down on untaxed benefits.
In this article, I’ll recap company cars and explain the basics of what’s what.
Company Car or Car Allowance?
People tend to use company car as a catch-all term for any car provided or paid for by a company for an employee. Well, technically, there’s two different things we need to talk about here.
First, a basic company car. This is nice and simple, the company buys or uses car leasing to the employee. The employee uses it for the duration of their contract then returns it to the company.
Second, a car allowance. With a car allowance, the company gives the employee a wedge of extra cash and then the employee buys or leases a car themselves.
For this article, I’m just talking about company cars and not car allowances. If you want to know more about car allowances, check out my blog here.
Why Do Businesses Offer Company Cars?
There’s a load of reasons why a business might provide a company car to an employee. It might be a means to attract or retain staff, to ensure their safety while driving and, at least in the past, to reduce tax liabilities.
Are Company Cars Tax Free?
In the past, businesses could offer their employees a company car on top of their base salary and that was it.
However, all good things must come to an end and HMRC eventually began cracking down and insisting that employees paid tax on what they called a benefit in kind (BIK).
A benefit in kind is just a benefit they receive that is not included in their salary. Think free accommodation, relocation expenses, transportation and so on.
Company cars are counted as a benefit in kind and employees now have to pay tax on them. How much you pay depends on emissions and is explained in more detail by our good friend Ben Powell in his article ‘How Do Cars Affect Benefit in Kind (BIK)?’