By WatkinsonBlack
Providing a vehicle to an employee can be a valuable benefit, but it often carries a significant tax cost. Where a car is made available for an employee’s private use, an income tax charge arises under the benefit-in-kind rules. Understanding how these charges work, and how recent changes affect certain vehicles, is essential for employers and employees alike.
Benefit in Kind Income Tax Charges
The taxable value of a company car is calculated using the vehicle’s list price, reduced by up to £5,000 where the employee makes a capital contribution. This figure is then multiplied by a percentage based largely on the car’s CO2 emissions.
For the 2024 to 2025 tax year, the maximum benefit in kind rate is 37 percent. Diesel cars that do not meet the RDE2 emissions standard suffer a further 4 percent surcharge. At the other end of the scale, zero emission vehicles attract a rate of just 2 percent.
Hybrid vehicles are taxed according to their electric only range. In 2024 to 2025, cars capable of travelling 130 miles or more on electric power are taxed at 2 percent. Vehicles with a range of 70 to 129 miles are charged at 5 percent, 40 to 69 miles at 8 percent, 30 to 39 miles at 12 percent, and those capable of travelling less than 30 miles at 14 percent.
Petrol cars with emissions of 50 grams per kilometre or less also attract a 14 percent rate, with the percentage increasing by 1 percent for every additional 5 grams per kilometre.
These rates are set to increase over time. From 2025 to 2026, the 2 percent rate rises to 3 percent, while petrol cars with emissions of 50 grams per kilometre or less increase to 16 percent. By 2027 to 2028, these rates will rise further to 5 percent and 18 percent respectively, making company cars progressively more expensive from a tax perspective.
National Insurance Contributions
In addition to income tax, National Insurance applies to company car benefits, but only for the employer. Class 1A National Insurance contributions are payable on the taxable value of the benefit at 15 percent from April 2025.
Pool Cars
No income tax or National Insurance charge arises where a vehicle qualifies as a pool car. To meet this definition, the car must be used by more than one employee, any private use must be incidental, and the vehicle must normally be kept at the employer’s premises overnight. In practice, these conditions can be difficult to satisfy and are often closely scrutinised.
Fuel Provided for Private Use
Where an employer provides fuel for private journeys, a separate fuel benefit arises. For 2025 to 2026, this is based on a fixed amount of £28,200, multiplied by the same percentage that applies to the car. This benefit is subject to income tax and employer National Insurance.
The fuel benefit can be eliminated if the employee reimburses the employer in full for private fuel using approved mileage rates. Partial reimbursement will not remove the charge.
Vans and Other Vehicles
Vehicles that are not cars but have four wheels are generally treated as goods vehicles, provided their construction is primarily suited to carrying goods. Vans are subject to a simpler benefit in kind regime, with a flat rate benefit of £4,020 for 2025 to 2026 and a flat fuel benefit of £769.
However, where a van has a second row of seats for passengers, it may be treated as a car. Case law has confirmed that if the carriage of passengers is more than incidental, the vehicle is likely to fall within the car rules.
Vans also benefit from more favourable capital allowance treatment and may allow recovery of input VAT, making them attractive where they qualify.
Vans can offer a significantly lower taxable benefit, but only where they are genuinely designed and used primarily for carrying goods. A second row of seats increases the risk of the vehicle being treated as a car. Employers should review vehicle choices carefully and seek advice before committing to new purchases.
Double Cab Pick Up Trucks
Historically, double cab pick-up trucks have been treated as vans for benefit in kind purposes, provided they met the VAT payload test of at least one tonne. This position is changing.
From 6 April 2025, double cab pick-ups purchased or ordered on or after that date will be treated as cars for benefit in kind and capital allowance purposes, following the withdrawal of the payload test announced in the October 2024 Budget.
Transitional rules apply to existing vehicles. Pick-ups purchased or ordered before 6 April 2025 can retain their van status until disposal or 5 April 2029 if earlier. These changes do not affect their VAT classification.
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation. If you are employed or self-employed either as a sole trader, partnership or limited company and want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us by telephone on 01925 413210 or by e-mail to info@watkinsonblack.com. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
