Company car guide

A company car sounds like a great perk, but it can also be a big expense; follow our tips to choose the best car, pay the least tax and decide if you'd be better off with a cash alternative...

2019 Mercedes CLA vs Audi A5 Sportback vs Jaguar XE

Does your company car make financial sense? The idea of being able to drive something brand new without any initial outlay – or the need to pay for insurance or maintenance – might sound like a dream come true, but you need to go in with your eyes open.

If your job demands you spend a lot of time on the road, then chances are you'll automatically be supplied with the company's standard model (common options include the Ford Focus and Vauxhall Astra), but you may also be offered a wider choice.

Some employers will give you the option to 'upgrade yourself' by letting you make a cash contribution to the car, or you could get a rebate if you take something cheaper.

However, even if you're a senior executive, the list of new cars available may incorporate restrictions on CO2 emissions or safety ratings to help keep down leasing costs.

Things are a lot more complicated than they initially look, then, but don't worry; we've got everything you need to know.


How is company car tax calculated?

For most company car users, the biggest downside is the tax to be paid for the 'benefit' of having a car. As soon as you use the car for a personal reason – which includes driving to and from work – Her Majesty’s Revenue and Customs (HMRC) sees it as a taxable asset (or benefit in kind in government speak).

The benefit in kind rate that HMRC attaches to your car is a percentage of its P11D price (the list price including VAT and delivery charges but excluding the first registration fee), based on how much CO2 it emits. The lower the car’s emissions, the lower the rate of BIK; for example, a zero emission car has a rate of 9% and a car with high emissions will attract a rate of 37%.

To calculate your benefit in kind tax, multiply the car’s P11D value by the percentage that applies to its CO2 emissions. Then you’ll need to multiply that figure by the income tax band you are in: either 20% or 40%. This will give you the amount of tax that will be deducted from your wages.

It’s worth noting that the 2017 Finance Bill changed the rules on how much company car drivers pay in tax. Instead of simply being taxed on the benefit in kind value of their chosen vehicle, they will be taxed on whichever is higher – the benefit in kind value or the salary sacrifice amount. This change applies to all vehicles except ultra-low emissions ones, which are governed by the previous rules until 2021.

Fuel – to pay or not to pay?

Your employer might offer to pay for all your fuel, but this is another area where you have to do your sums before you accept, because it counts as another benefit, which means you'll have to pay tax on it.

If you don’t do that many miles, it may be cheaper for you to pay for your own fuel. The next question is do you choose a diesel, petrol, hybrid or electric vehicle as your company car.

Make sure you study our True MPG figures as part of your research – these give the best indication as to what a car will achieve in the real world, as opposed to laboratory test conditions. Meanwhile, our What Fuel? tool will tell you which type of car should cost you least based on the type of driving you do.

Next: Company car tax bands >>

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