Tax and the Company Car (or Van!)

Many businesses need to have company vehicles to conduct their day-to-day work. When it comes to choosing a company vehicle, it is normal to purchase or lease for a period often of around 3 years, so it is important to choose the type of vehicle that suits the purpose. This might be a company car or a commercial vehicle taxed as a van, but before committing to the contract it is important to consider whether to purchase or lease, and the tax implications both for the employer and the employee over the intended period of use.

As the government’s strategic approach to taxation continues to evolve, the choice of diesel, petrol, hybrid, electric or other fuel is also an important one. The previous Conservative government had increasingly encouraged the use of vehicles with a low C02 emission g/km which is reflected in tax charges and incentives.

The Labour government in the first Autumn Budget Statement 2024, stated that they saw the transition to electric vehicles (EVs) as crucial to decarbonising transport, with a vision that new cars that rely solely on internal combustion engines (ICE) will be phased out by 2030, and that from 2035 all new cars and vans sold in the UK will be zero emission.

This aim is to be supported by:

• Investment in accelerating EV chargepoint roll out.
• Introducing a plug-in vehicle grant for the purchase of new electric vans
• Supporting the manufacture of wheelchair accessible EVs
• Maintaining tax incentives to invest in EVs:

Lower Vehicle Excise Duty First Year Rates

Company Car Tax Regimes

Extending 100% first year allowances for EVs and charge points by one year

Company car tax rates were announced for 2028-29 and 2029-30 which will provide some certainty, but the trend is upwards for all types of vehicles, so even driving a fully electric company vehicle can become more expensive.

Fully electric cars that currently have a benefit-in-kind (BIK) rate of 2% will rise to 5% by 2027/28.

The current highest BIK rate of 37% will be charged on more vehicles as the CO2 g/km threshold is reduced and the BIK percentage will be increased to 38% in 2028-29 and to 39% in 2029-30.

Rates for hybrid vehicles will rise to align more closely with internal combustion engine (ICE) vehicles.

The Autumn Statement 2024 also treats double cab pick-up vehicles, that had previously enjoyed the beneficial tax treatment as a van, to be taxed as a company car from April 2025, but for existing vehicles (contracted up to 5 April 2025) transitional relief is available until 5 April 2029.

It is likely therefore, that there will be some good deals in new pick-up trucks available in March 2025, to lock in the beneficial current tax treatment for up to four years.

Once the type of vehicle has been tentatively chosen, the tax implications are the next consideration.  These are the main points to bear in mind:

• Income Tax
• Company Van
• Keeping a company vehicle at home
• Company Car Fuel Benefit
• Company Van Fuel Benefit
• Electric Charging
• Corporation Tax
• Relief for Unincorporated Businesses
• Leasing of motor vehicles
• Planning for the Future – Electricity and Hydrogen
• Enhanced Capital Allowances (ECA)

Income Tax

A company car or van is regarded by HMRC to be a non-cash reward for the employee, or a benefit in kind (BIK).  This means that tax needs to be paid by the employee on this, which is referred to as a taxable benefit.  The taxable benefit is calculated from the list price of the car multiplied by the taxable benefit %.

This % is determined by the CO2 emissions of the car and the electric mileage range: the lower the emissions and the higher the electric mileage, the less tax is due.

Announced in the Autumn Budget Statement 2024:

• Appropriate Percentages (APs) for zero emission and electric vehicles will increase by 2 percentage points per year in 2028-29 and 2029-30, rising to an AP of 9% in 2029-30.
• APs for cars with emissions of 1 – 50 g of CO2 per kilometre, including hybrid vehicles, will rise to 18% in 2028-29 and 19% in 2029-30.
• APs for all other vehicle bands will increase by 1 percentage point per year in 2028-29 and 2029-30. The maximum AP will also increase by 1 percentage point per year to 38% for 2028-2029 and 39% for 2029-2030. This means for vehicle bands with emissions of 51 g of CO2 per kilometre and over, APs will increase to 19% – 38% range in 2028-29 and 20% – 39% range in 2029-30.

These are the rates for the period 6 April 2022 to 5 April 2030:

For company cars with CO2 emissions exceeding 54 g/km the employee’s taxable benefit increases by 1% for every 5 g/km up to a maximum of 38% in 2028-29 and 39% in 2020-30.  Diesel cars that do not meet the RDE2 standard are also subject to a 4% supplement.

The taxable benefit will depend on the vehicle and will be taxed as employment income at the employee’s marginal rate of income tax.

For example, a company car with CO2 emissions of 30 g/km and an electric range of 50 miles would have a taxable benefit of 8% now but that would increase to 19%.  If the car had a list price of £35,000 the benefit-in-kind value for the tax year would be £2,800 in 2024/25 to £6,650 in 2029/30.

As a result, a higher rate taxpayer with a marginal tax rate of 40% would pay £1,120 of income tax for the year 2024/25, compared to £2,660 for private use of the same company car in 2029/30.

If the employee contributes towards the purchase of their company car (classed as a capital contribution), this will reduce the list price for these purposes, resulting in less tax to pay, however the maximum deduction that can be made is £5,000.

Company Van

Company van benefits are calculated as follows:

Calculating a company van benefit is a much simpler process as the list price, CO2 emissions and electric mileage range are not considered when calculating the taxable benefit.

As with company cars, the taxable benefit on a van will be taxed as employment income at the employee’s marginal rate of income tax. However, if a company van is used privately, and the usage is insignificant or it is only for commuting purposes, then no taxable benefit arises.

HM Revenue and Customs defines a van as “a vehicle primarily constructed for delivering goods with a fully laden gross weight of 3.5 tonnes.” It is designed as a vehicle primarily suited for the conveyance of goods of any description.

However, note the change in the classification of double cab vehicles from a van to a car, which will make this potentially a very expensive company vehicle in the future.

Keeping a company vehicle at home

A company car used by an employee and kept at their home overnight is deemed by HMRC to be available for private motoring, which includes home to work commuting. This means that a taxable benefit will be incurred by the employee.

In contrast, a van can be taken home overnight, and if no other significant private motoring is undertaken in the vehicle, home to work site commuting will not create a taxable van benefit for the employee.

Company Car Fuel Benefit

Where the employer pays all the fuel costs, (including private journeys) a separate taxable benefit arises, unless the employee, reimburses the employer in full for the fuel used for private motoring. Where the employee pays for all the fuel and the employer reimburses them only for the business fuel cost, no taxable benefit will arise on the employee. As with the company car benefit, the car fuel benefit is subject to income tax, which the employee will pay at their marginal tax rate.   The marginal tax rate relates to the band of tax in which the benefit is taxed after taking into consideration other sources of income such as salary, i.e. 20%, 40%, or 45%.

In order to calculate the taxable benefit, the following formula is used for the 2025/26 tax year:

£28,200 x “taxable benefit %”

To calculate the appropriate percentage of taxation, the same method as detailed above is used. In other words, the taxable benefit % is calculated by the C02 emissions of the car and its electric mileage range.

Company Van Fuel Benefit

The Autumn Statement 2024 announced that the van and van fuel benefit charges are to be increased in line with the CPI with effect from 6 April 2025.

If free or subsidised fuel is provided to the employee for private use in a company van, they will be taxed on a van benefit of £769 for the 2025/26 tax year, at their marginal rate of income tax.  There is no reduction in the taxable benefit where an employee makes a contribution towards private fuel for the van.

Vehicle Excise Duty on Electric Vehicles

The government will uprate standard Vehicle Excise Duty (VED) rates for cars, vans and motorcycles, excluding first year rates for cars, in line with the RPI from 1 April 2025.

VED First Year Rates – The government will change the VED First Year Rates for new cars registered on or after 1 April 2025 to strengthen incentives to purchase zero emission and electric cars, by widening the differentials between zero emission, hybrid and internal combustion engine (ICE) cars.

• Zero emission cars will pay the lowest first year rate at £10 until 2029-30.
• Rates for cars emitting 1-50 g/km of CO2, including hybrid vehicles, will increase to £110 for 2025-26.
• Rates for cars emitting 51-75 g/km of CO2, including hybrid vehicles, will increase to £130 for 2025-26.
• All other rates for cars emitting 76 g/km of CO2 and above will double from their current level for 2025-26.

These changes will apply from 1 April 2025

Electric Charging

Where electric charging is made available to an employee at their place of work, and provided this is available to all employees, this is a tax-free benefit and no benefit-in-kind charge arises, regardless of their level of private mileage.

In addition to this, where an electric company car is provided to an employee and an electric car charger is installed at their home, the cost of installing this is also tax free. However, if the employer pays to install an electric charger at an employee’s home for the employee’s private vehicle, this will result in an income tax liability on a taxable benefit for the employee at their marginal tax rate.

Special rules apply to electricity used to charge a fully electric company car, as it is not regarded by HMRC as a “fuel”, and the HMRC guidance in this respect continues to evolve.

Corporation Tax

Businesses purchasing company cars are eligible for a Corporation Tax deduction. They will need to claim this as a capital allowance on the purchase, which means part of the value of the car can be deducted from a business’s profits before they pay tax. The current tax relief is:

The 100% First Year Allowances for zero emission cars is in place until 31 March 2026.

Vans and commercial vehicles are classed as qualifying assets for Annual Investment Allowance (AIA) purposes. This means that tax relief can be claimed at 100% of the purchase price, provided sufficient AIA is available. The AIA limit is currently £1m.

Full expensing relief at 100% has been introduced permanently for companies, which will apply once the AIA has been fully utilised.

Tax advice will need to be taken in relation to the claiming of allowances by Groups.

If the benefits provided to employees are not included within their payroll then a P11d must be submitted to HMRC by 6 July following the end of the tax year. Class 1A NIC is due to be paid by the employer at a rate of 13.8% for the 2024/25 tax year, (increasing to 15% from 2025/26) on the value of benefits provided to employees. This is payable to HMRC on or before 22 July following the end of the tax year.

Relief for Unincorporated Businesses

Sole-traders and partnerships are also able to claim Capital Allowances on the purchase of cars as detailed above, but the first-year allowances can be claimed by companies only.

Leasing of motor vehicles

If instead of purchasing a vehicle, a leasing arrangement is entered into, the costs incurred in leasing it are treated as allowable revenue expenditure and therefore no Capital Allowances can be claimed on these vehicles.

The type of lease entered into will determine the expenses that are tax deductible. There are two ways in which you can lease an asset: an operating lease or a finance lease.

• If the lease is an operating lease, then the total expense will be the lease rentals that are shown in the profit and loss account, subject to the potential restriction noted below.
• If the lease is a finance lease, then the total expense will be the finance lease interest and the finance lease depreciation figures that are shown in the profit and loss account.

Where a car is leased with CO2 emissions exceeding 50g/km, a lease rental restriction applies. This means that 15% of the expenses are disallowed for tax purposes as the lease relates to a high emission car.

The treatments of lease arrangements are the same for companies, sole-traders, and partnerships.

Planning for the Future – Electricity and Hydrogen

• Freeport East Hydrogen Hub is located at Harwich and is part of the Government’s decarbonisation scheme strategy.
• At the anticipated peak by 2030 the aim is to produce 1GW of hydrogen at Freeport East.
• To encourage use of low carbon fuels, Enhanced Capital Allowances (ECA) have been introduced.

Enhanced Capital Allowances (ECA)

Enhanced Capital Allowances (ECA) are available on these items:

• New and unused zero-emission cars
• New and unused zero-emission goods vehicles
• New electric vehicle charging points
• Gas refuelling stations

In respect of these items, allowances are available at 100% tax relief with no annual limit where the expenditure qualifies for ECA.

To qualify for ECA, the expenditure must be incurred on or before 31 March 2026 except for expenditure in respect of new electric vehicle charging points, where the expenditure must be incurred on or before 31 March 2026 (or 5 April 2026 for unincorporated businesses).

‘Gas refuelling stations’ are classified as storage tanks, compressors, pumps and any equipment for dispensing natural gas, biogas or hydrogen fuel for the refuelling of vehicles. However, it is important to note that ECA cannot create a repayable tax credit for gas refuelling stations.

ECAs are also available for qualifying expenditure on plant and machinery for use primarily within a tax Freeport site, but are only available to companies and not for unincorporated businesses.

ECAs are available for relevant qualifying expenditure incurred until 30 September 2031 and a claim for the enhanced allowances will need to be made via a business’ Corporation Tax Return.

However, where the plant or machinery needs to be used primarily outside a designated Freeport tax site within five years from when it was acquired, the ECAs tax relief that has been claimed will be withdrawn.