A company car is still regarded by many as one of the best perks out there. For decades, company cars have been used as a tax-efficient benefit for employees. Instead of paying for your own car out of your own income, your employer would pay for it for you! (Often employers would use car leasing so they could replace the vehicles every few years, which reduced depreciation and maintenance worries.)
However, HMRC got frustrated at all the potentially taxable income being lost and started tightening restrictions on company cars.
While they're still a great way to offer benefits to staff, it's not quite as simple as it was a decade ago.
In this section, I'll take a look at the traditional company car, the cash option alternative, emissions and benefit in kind.
What is a Company Car?
A company car isn’t a particularly complicated idea. It’s just a car that a company pays for but an individual uses. For example, say Virgin Atlantic leases a Rolls-Royce Wraith and gives it to Richard Branson to drive about in. That’s a company car.
It’s basically a way for a business to give a staff member and extra perk on top of their base salary. And, at least originally, it was a pretty tax-efficient way of doing so.
Nowadays, it’s a lot more complicated with a bunch of HMRC rules and regulations to contend with.
That’s not to say company cars aren’t a good idea though. They are a great way to provide stress-free motoring for your employees. For a balanced look, check out our pros and cons article.
What is a Car Allowance or Cash Option?
An alternative to a standard company car is something called a car allowance or cash option. This is when a company takes the amount that they would have spent on a company car and gives it directly to the employee. The employee then uses that money to arrange a car for themselves.
There’s a bunch of pros and cons to a cash allowance but it basically boils down to increased choice on one hand and increased taxes burdens on the other.
In recent years, cash allowances have become the more popular of the two options, primarily due to the increased flexibility. However, both options still have their advantages and disadvantages. For a more in-depth comparison, check out our blog post here.
How Do Cars Affect Benefit in Kind (BIK)?
The tax legislation lays out a specific method for how you calculate the taxable benefit in kind for a car provided by your employer. We roped in Ben Powell of award-winning chartered accountancy firm, Ballards LLP to explain car benefits, fuel benefits and everything else you need to know about benefit in kind.
Check out Ben's full article here.
Do Emissions Matter?
As with most things nowadays, emissions play a big role in determining how cost-effective a company car is. Although it's pretty technical, the short version is that you'll pay more to drive a car with high emissions than you will to drive one with low emissions.
Here's a super quick example to illustrate just how much big a role emissions play.
Let’s say you lease a Nissan Qashqai Visia 1.2 DIG-T 115 for your employee. The Qashqai costs around about £19,300 to buy new. Since it emits 129 g of CO2 per km, it has a taxable rate of 26% in 2018/19 so has a BIK value of £5,018.
Now let's compare that to a Fiat Doblo 1.4 Pop. The Doblo costs about £12,995.90 to buy new, which is substantially less than the Qashqai. However, with CO2 emissions of 165 g per km, it attracts a taxable rate of 34% so has a BIK value of £4,418.61.
As you can see, emissions can have a huge impact on how cost-effective a company car is! Despite being £6,300 cheaper to buy, the Doblo has a BIK value just £600 shy of the Qashqai!
For an in-depth look at emissions and company cars, check out our article here.