Company Cars: Capital Allowances, Tax Relief and Benefit-in-Kind Implications

Company cars come with a mix of tax opportunities and compliance challenges for UK businesses. When a company buys a car, it’s treated as a business asset, eligible for capital allowances that let businesses deduct the cost from taxable profits over time. However, if directors or employees use the car for personal trips, benefit-in-kind (BIK) rules kick in, impacting both the employee’s income tax and the employer’s National Insurance contributions. Striking a balance between tax efficiency and regulatory compliance hinges on the vehicle’s type, its CO₂ emissions, and how much private use occurs.

From an accounting perspective, a company car sits as a fixed asset on the balance sheet, governed by Part 2 of the Capital Allowances Act 2001. Unlike some plant and machinery, cars don’t qualify for full expensing or the Annual Investment Allowance. Instead, they’re written down based on their emissions. HMRC’s Capital Allowances Manual (CA23510 onwards) explains that cars emitting up to 50g/km of CO₂ go into the main pool, attracting an 18% writing-down allowance. Higher emitters, above 50g/km, fall into the special rate pool with a 6% annual allowance on a reducing balance basis. New and unused fully electric cars stand out, qualifying for a 100% first-year allowance under section 45D, a strong incentive for low-emission investments. Second-hand zero-emission cars, however, miss out on this and instead get an 18% allowance in the main pool. Businesses should keep an eye on Budget announcements, as the availability of the first-year allowance could shift.

When a car is used solely for business, claiming these allowances is straightforward. But things get trickier when directors or employees use it for private purposes. This triggers a benefit-in-kind, calculated under Chapter 6 of Part 3 of the Income Tax (Earnings and Pensions) Act 2003. The taxable benefit is based on the car’s list price when new, multiplied by a percentage tied to its CO₂ emissions, as set out by HMRC each year. Lower emissions mean a lower percentage. For 2025/26, electric vehicles carry a 3% BIK rate, though this is expected to creep up in future years and may be revised in upcoming Budgets. Petrol or diesel cars, on the other hand, face rates from 15% to over 37%, depending on their emissions band. HMRC’s Company Car Tax table and online calculator help employers pin down the exact BIK value.

Avoiding the BIK charge is possible if the car has no private use, but this needs solid proof like mileage logs and written agreements. HMRC is strict about “availability” and “use”—even if the car isn’t driven privately, it’s taxable if it’s available for personal use unless restrictions are clear. Businesses often limit private use through contracts, physical measures like returning keys to the employer, or by using pool cars that aren’t assigned to one person and meet HMRC’s criteria in EIM23450.

Providing a car for private use also hits employers with a Class 1A National Insurance charge at 15% of the BIK value, reported annually via P11D forms. Fuel provided for private use adds another layer of complexity, with a separate BIK charge based on a fixed multiplier—£28,200 for 2025/26—applied to the same CO₂ percentage as the car benefit. To sidestep this, many employers ask employees to cover their own fuel or fully reimburse private fuel costs.

Compliance is critical. Businesses must keep detailed records of vehicle use, emissions, and availability terms, with P11D forms due by 6 July after the tax year. Directors of owner-managed companies need extra caution, as HMRC often assumes availability for private use, and informal arrangements won’t pass muster.

Tax efficiency depends on several factors: the vehicle type, private use extent, available allowances, and employer costs. Fully electric cars are a sweet spot, combining 100% first-year allowances, low running costs, and minimal BIK charges. For conventional vehicles, though, the tax, National Insurance, and compliance costs can outweigh employee benefits, making alternatives like mileage reimbursements at 45p/25p per mile or car allowances more appealing.

Ultimately, a company car is both a balance sheet asset and a potential tax liability under the BIK regime. Its treatment blends capital allowances and employee benefit rules, with impacts on corporation tax and payroll. As HMRC guidance and tax rates evolve, especially with environmental policy shifts, businesses should regularly review fleet policies and consult current resources or professional advisers before making vehicle decisions.

Article Added:26/06/2025

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