Tax Rules on Company Cars

2. The director or employee usually pays tax

If the car is available for private use, HMRC treats it as a Benefit in Kind (BIK).

This means:

• The director/employee pays income tax on the benefit

• The company pays Employer’s NI (15% from April 2025)

The tax is based on:

• The list price of the car

• The CO2 emissions

3. Electric cars are usually the best option

Electric vehicles currently have very low BIK rates (only 4% in 26/27).

For example:

• Electric car BIK rate is currently very low compared to petrol/diesel. This can make company ownership far more tax-efficient.

This is why many directors are choosing electric company cars.

4. Fuel for private use creates another tax charge

If the company pays for private fuel, there is an additional benefit charge.

This is often very expensive, so many people avoid this.

Instead they:

• Pay for private fuel themselves

• Claim business mileage

5. Sometimes a personal car is better

In some situations, it’s more tax-efficient to:

• Own the car personally

• Claim 45p per mile for business travel

This avoids Benefit in Kind tax completely.

6. What about VAT on company cars?

VAT recovery on cars is very restricted, so many businesses are surprised by this.

If the company buys a car

In most cases:

• You cannot reclaim the VAT on the purchase price.

This is because HMRC assumes the car will have some private use.

The only situations where VAT may be reclaimed are when the car is:

• Used exclusively for business

• Not available for private use

• Normally kept at business premises overnight

This is quite difficult to prove, so most businesses cannot reclaim VAT on the purchase of a car.

If the company leases a car

VAT rules are different for leases.

Usually:

• 50% of the VAT on the lease payments can be reclaimed

This restriction exists because HMRC assumes some private use.

However:

• 100% of the VAT can usually be reclaimed on maintenance costs within the lease.

VAT on fuel

If the company pays for fuel:

• VAT can be reclaimed on business fuel

But if fuel is also used privately, you must either:

• Keep detailed mileage records and reclaim only business fuel VAT

OR

• Apply the fuel scale charge

Many businesses avoid this by simply paying for private fuel themselves.

Simple rule of thumb

A company car can be great, but the tax impact needs checking first:

• VAT recovery is usually restricted

• BIK tax often applies

• The type of vehicle has a huge impact