Buying a company car looks simple. The tax rules are not. This guide explains the company car tax pros and cons for UK directors and employees. We cover costs, reliefs, benefit in kind (BIK), funding choices, and when a personal car with mileage claims can be better.
Written by Khoob Accountancy – accounting and bookkeeping experts, trusted by London businesses, accountants in Kensington and Barnet accountants, with bilingual support from our french speaking accountants in London. We deliver smart virtual accounting services, employment tax and payroll, and accounting and taxation services across the UK.
Quick view: company car tax pros and cons
- Pros: claim running costs; capital allowances; potential VAT recovery; strong EV incentives; staff benefit; simple fuel control.
- Cons: BIK on private use; Class 1A NIC for the employer; higher insurance/maintenance; depreciation; admin and record-keeping.
How funding changes company car tax (lease, HP, buy)
Funding affects tax, cash flow, and your balance sheet.
Lease (contract hire)
- Monthly rentals are deductible when incurred.
- Lower upfront cash. Predictable costs.
- Some VAT recovery possible on rentals (subject to private use rules).
Hire purchase (HP)
- Car is a company asset. Interest is deductible.
- Tax relief via capital allowances. In high-profit years this can help smooth tax.
- Higher initial commitment and reported debt may affect borrowing ratios.
Outright purchase
- Simple ownership but ties up cash.
- Tax relief via capital allowances only (no AIA for cars; EVs may get 100% FYA if new).
Capital allowances & company car tax UK
Cars do not qualify for AIA. Relief is via writing down allowances based on CO₂:
- 18% main rate: ≤50g/km (includes used EVs).
- 6% special rate: >50g/km.
New fully electric cars can qualify for a 100% first-year allowance. This can deliver large relief in year one, subject to profits.
Electric company car tax – big pros right now
- Low BIK rates (currently very low compared with petrol/diesel). Rates rise slowly until at least 2029–30.
- Potential 100% FYA on new EVs; used EVs use writing down allowances.
- Workplace charge points may qualify for 100% relief on installation.
Benefit in kind (BIK) – where costs bite
If a car is available for any private use, the employee/director is taxed on a BIK. The employer also pays Class 1A NIC on that value.
- BIK is based on list price, CO₂, and fuel type. Higher CO₂ = higher BIK %.
- Private fuel is a separate BIK and can be costly. Most businesses avoid it.
- EVs are far more efficient for BIK than petrol or many hybrids.
Company car vs personal car + mileage
Not everyone needs a company car. Using a personal car and claiming mileage can be simpler and often cheaper.
- Mileage rates: 45p per mile for the first 10,000 business miles each tax year, then 25p.
- No BIK. You keep full choice of vehicle and finance.
- Great for lower annual mileage or mixed private use.
Worked example (illustrative only)
Taxable profit before car: £75,000 → corporation tax ~£16,125 (effective 21.5%).
Car purchase: £30,000 (eligible allowances applied) → revised taxable profit ~£45,000 → corporation tax ~£8,550.
Indicative saving ~£7,575 from capital allowances, before BIK/Class 1A and running costs.
Pros and cons checklist for directors
- Pros: claim costs; potential VAT relief; capital allowances; strong EV tax position; staff retention tool; clear business image.
- Cons: BIK for user; employer Class 1A NIC; higher insurance; depreciation risk; admin; cash flow impact with HP/buy.
When salary sacrifice helps
For low-emission or EVs, a salary sacrifice car can reduce employee tax and NIC and lower employer NIC. Check affordability, BIK class, insurance, and early-termination rules.
How to decide – simple steps
- Estimate annual business miles and private use.
- Compare EV BIK vs petrol/diesel BIK.
- Test three funding routes: lease, HP, buy. Model cash flow.
- Factor insurance, servicing, tyres, and any downtime.
- Compare with personal car + mileage method.
Work with experts who know your sector
Khoob Accountancy can help you choose the best route and stay compliant with employment tax and payroll, capital allowances, and Class 1A NIC. We support tax support for London businesses, bookkeepers in England, and nationwide through our virtual office accounting service.
Looking for guidance on how to choose an accountant or how to find an accountant for your business? Our team of french chartered accountants and advisers in London, Kensington, and Barnet are ready to help.
Talk to Khoob Accountancy
Need a clear answer for your business car plan? Get a short, practical review of company car tax pros and cons tailored to your numbers, goals, and cash flow. We can also review new rules for registered office addresses, payroll set-ups, and how to manage payroll for a small business.
Email us today for a free initial chat and options summary.
