Is A Company Car Worth It?

Are you an employer considering offering company cars? Or an employee who has just been offered a company car? Either way you want to know what it entails, what it’ll cost you and simply whether it’s worth it or not. 

To help you out, we’ve explained what a company car is, explored the pros and cons of a company car for both employers and employees, and outlined how company car tax works. 

By the end of this article you will have an answer to “Is a company car worth it?”

What Is a Company Car?

There’s sometimes a little confusion over what a company car actually is. As an employee, do you get to keep it when you leave? Do you pay anything for it?

A company car is a car that is given to an employee by their employer as a means of transport for personal and/or business use.

The car is owned or financed by the company, not the employee. If the employee leaves the company, the employer has the right to take the car back.

Since the car is the property/financed by the company, it is the company’s responsibility to pay for insurance, maintenance, MOTs, and car repairs.

The employee should still ensure that the car is road-legal and safe before getting behind the wheel!

Back in the day, company cars were bought in bulk and fleets of one car were handed out to employees, without their opinion being considered. Now it is common practice for employers to provide their employees with a list of pre-approved vehicles for them to choose from

For Employees: Pros and Cons of a Company Car

So, you’ve been offered a company car and you’re not quite sure what it means or who is responsible for what? To make sure you understand what you’re signing up for, we’ve rounded up the pros and cons of having a company car. 

Pros: 

• No unexpected costs - maintenance, servicing and insurance are the responsibility of your employer.
• Access to the latest models of cars - if your company uses a method like leasing, they can give you a high spec, brand new model every 2-4 years.
• Benefit in Kind tax is lower than other payments - depending on the CO2 emissions of the car, your BIK tax liability will be far, far lower than the cost of the car, insurance, maintenance, etc, saving you big bucks.
• No financial ties to a contract - It is your employer’s responsibility to afford and make the monthly payments. 

Cons:

• Vehicle restrictions - Your employers may provide you with a small list of vehicles to choose from, meaning you may not get your top pick or the car you had in mind.
• You can’t keep the car if you move company - If you decide to move on from your current employer, the car stays with the company.
• Fuel benefit tax - If fuel is included in your company car package, you may need to pay Fuel Benefit Tax.
• BIK tax not so good for non-EVs -  If your company opts for a high value car that emits high levels of CO2, you can expect a chunky BIK tax bill, especially if you’re also in a high income tax bracket.

For Employees: Company Car Tax

When you receive an additional work benefit like a company car, you have to pay benefit in kind (BIK) tax.

The amount of tax you pay on a company car varies depending on how you use it. Most people use their company cars for personal use as well as business (and commuting falls under personal use!), so they need to be taxed on this.

The BIK tax rates are calculated based on:

• Age of the Car
• Fuel Type
• CO2 Emissions 
• Engine Size
• List Price of Car

To calculate your BIK tax liability, you do the following calculation:

P11D Value of the Car x BIK tax rate x Your Income Tax Band %

So, for example, say you were offered a Tesla Model 3 (RRP £42,500) which emits no CO2 (putting it in 2% tax band for 2022), and you earn £40,000 (in England, this puts you in 20% tax band), the calculation would be as follows:

£42,500 x 2% x 20% = £170 BIK tax/yr = £14.17/month.

If you were offered a diesel BMW 3 Series Saloon (RRP £29,990) which emits 146g CO2/km (38% BIK tax for 2022, and you earn £40,000 (still in England, paying 20% income tax), it would be as follows:

£29,990 x 38% x 20% = £2,279.24/yr = £189.94/month.

As you can see, company car tax on electric cars is significantly lower, so if you have the choice, ask your company if they can lease an electric vehicle.

For Employees: Should You Take A Company Car?

Generally company cars are offered as a perk to a job, or sometimes as an incentive to accept a job offer, or even in place of a salary increase. 

Most people would be better off accepting a company car. It’s a fuss-free way to get a nice, new car - no need to worry about expenses other than benefit in kind tax!

However it make not be for you if:

• The benefit in kind tax is astronomically high (diesel cars, high list price, high CO2 emissions).
• You already have a car you wouldn’t otherwise use, and it would be inconvenient to sell it on/end your contract early.
• You are being offered a company car or car allowance, and you’d prefer to have the car contract in your own name.
• You don’t plan on sticking around at the company for too much longer and you want to make sure you’re not left without a car.

Overall, you need to consider tax and your personal preferences when deciding whether to take the shiny new company car!

For Employers: Pros and Cons of a Company Car

If you are an employer considering offering one or more of your employee’s a company car, then you might be wondering what the benefits and drawbacks are before you commit to getting one. 

Pros:

• Great incentive - A company car can act as a great incentive for attracting the best candidates or encourages offer acceptance during the recruitment process. It can equally help to retain current employees. 
• More control over company image - Choose specific car models that are in line with your business values, instead of your employee’s turning up at business meetings in an old banger!
• Can be offered using a salary sacrifice scheme - You can offer a company car using a salary sacrifice scheme, which means all or most of the cost of the car is covered by the employee.
• Contribute to wider sustainability goals - You can meet your internal environmental targets by offering electric or hybrid company cars, rather than your employees driving around in petrol and diesel cars.

Con’s:

• Increased liability - By providing your employees with a car, you are in charge of their safety. You must ensure the car is road-safe before handing it over.
• Tracking personal use - To retain value of the car or to avoid finance contract breaches, you’ll need to track employee use of the car. In leasing, mileage limits will be put in place, and you can face return charges if your employees exceed this. 
• Car running fees - You will need to cover the costs insurance, maintenance, servicing, MOT, road tax, and repairs.

For Employers: Taxing Company Cars

The majority of tax is covered by your employee, such as Benefit in Kind tax for their personal use or fuel consumption. 

In terms of other tax, if you opt for a business car lease:

• Road tax is included in the monthly fee. 
• If the company is VAT-registered, they can claim 50% of the VAT (if the car is also used for personal use) or 100% if it’s all business use.
• You can write it off as a business expense.

For Employers: Should You Offer a Company Car?

Before you commit to offering your employees a company car, one of the biggest things you will need to take into consideration is affordability. Can you afford to fund your employee’s vehicle i.e. pay the monthly lease payments and maintenance costs without stretching yourself too thin or at the detriment of other business functions? 

If you can afford the cost and the administrative time to coordinate the contract set up and ongoing maintenance of the company car, then it’s a great way to encourage loyalty and attract the best quality talent to your business.

However, it may not be the best choice if:

• Your business has a high turnover - you’re left paying for a car nobody will use.
• You don’t have the time to devote to taking out contracts for cars and ensuring employees abide by contract terms.
• You are experiencing affordability issues and think your employees would get a better spec car if you gave them a car allowance instead (see the next section for more info).

If you’re interested in business car leasing, you can read more about how much it costs to lease a car.

Alternatives to Company Cars

Company cars are a great incentive for employees, but they don’t suit everyone.

Usually, a company car is offered because the employer requires the employee to do a lot of business mileage, but sometimes it’s just an added extra.

Maybe the employee doesn’t drive or a car doesn’t suit their lifestyle. Maybe they’d prefer to have the car contract in their own name rather than tied to their job. Whatever the reason, here are the alternatives to a company car:

• Car Allowance -  A lump sum of cash added on to your annual salary to put towards a personal lease or purchase. Gives employee’s greater freedom of choice, and means employers are not financially liable.
• Negotiate Higher Salary - If you don’t need the car for business, or you already have a car you can use, you can ask for a higher salary.
• Ask for Different Work Benefits - If the car is simply a work benefit to entice you and the company doesn’t want to budge on the salary, you could ask for an alternative work benefit of similar value, like private health/life insurance or more paid time off. 

Conclusion

Looking at it from both sides, employee and employer, we hope that we’ve been able to provide some guidance over whether as an employer you should offer a company car, or as an employee you should accept the offer of a company car. 

In our opinion, as long as it suits the needs and budgets of both parties, a company car is a fantastic work benefit that is well worth taking.