Company or employee car schemes are a popular way for a business to offer its employees the use of a vehicle for personal and business travel. They are a popular perk in many roles, with figures showing that company car fleets outsold private registrations by 100,000 in 2020, to date.
In businesses where a company car is not only an advantage but a necessity, a company car scheme (or company van scheme) allows employees to use the cars to do their jobs as well as to enjoy the cars for private usage. Some businesses even present the car scheme completely as a ‘perk’, with no impetus or obligation to use it for work purposes at all.
The advantages of running a company car scheme are manifold. Financially, a well-run company car scheme offers the benefits of allowing employers to claim capital allowances that reduce taxable profits and can cut employer National Insurance Contributions too. On a broader perspective, the ‘perk’ of using a company car can be a way to secure a great interviewee for a job, and keep existing employees feeling happy and rewarded. Other benefits include:
Advertising/branding can be added to the car’s paintwork (if owned not leased), adding another approach to your marketing strategy.
It’s a reward scheme that the employer controls, and can cease.
It does not increase either the wage bill or the pensions bill for the company.
There are no National Insurance implications for employees (although there are for employers).
Supplying a fleet with very low emissions levels can work to reduce your business's carbon footprint.
The convenience of a company car for employees is not only an excellent recruitment ‘perk’ but alleviates concerns surrounding car servicing, breakdown and replacement.
Company Car Schemes are not without their downsides, and it’s crucial for you to consider how the advantages and disadvantages align for your business. Downsides include:
The cost of buying cars is significant.
The employer is ultimately responsible for these vehicles, entailing a time and money investment.
Employees may need to pay Company Car Tax, dependent on the scheme you choose.
The employer must pay for registration and insurance, and the ultimate onus of owning the vehicle.
Vehicles must be fit for purpose - this ‘perk’ quickly becomes a bugbear if you expect a high-mileage driver to use a tiny and inefficient city car.
Setting up a company car scheme is not as difficult as you might think. Running a company car scheme requires a basic set up and some planning, as well as consideration of the tax implications for both employee and employer.
What to consider and weigh up:
How will you fund the initial outlay to buy cars and the continued funds for service and repair?
What kind of cars will you offer to fit both your brand and your budget?
How many employees will you offer this to / how many cars do you need?
Will you impose any restrictions on car usage?
What is the estimated annual mileage you expect if they travel for work?
What are the tax implications of providing a company car?
There are several different ways you can provide, and fund, cars for your employees. The five types of company car fleet funding available are Contract Hire, Contract Purchase, Finance Lease, Salary Sacrifice and Outright Purchase, which we will outline below.
Many businesses opt for the Contract Hire approach. It is an easy option for budgeting, allowing you to pay for the use of the vehicle for 24, 36 or 48 months before returning it at the end of the contract, without shouldering the burden of the vehicle’s depreciation. You simply set your lease term, estimate annual mileage (penalties will apply if you go over, so this is crucial), and select your cars.
The tax and accounting advantages of Contract Hire include being able to deduct the full cost of finance rentals from taxable profits (if the vehicle emits 130g/km of CO2 or less - claim 85% on higher emissions cars), as well as being able to recover 100% of the VAT for a business use only vehicle (50% of the VAT on a vehicle which includes private use too). You can also recover 100% of the VAT if you decide to include maintenance in your contract package. Check out Rivervale’s guide to Company Car Tax in-depth here.
To free up capital, opt for Contract Purchase. This offers the benefits of lower outright costs and fixed rental payments. In terms of accounting, the vehicle will appear on the balance sheet too, so you can claim capital allowances for it - although the finance part of your rental is not subject to VAT (perfect if you are not able to recoup VAT anyway). Basically, a Contract Purchase entails a deposit for a new car, then monthly payments over a contract period (usually 24-48 months), with a purchase option at the end too.
This entails leasing a new car from a service provider at a monthly rate. In this case, the business will never own the car. You will agree the resale value with the provider at the beginning of the contract, and if this resale figure ends up being lower, you must pay the difference. In terms of accounting, it appears on your balance sheet, with outstanding retails representing a liability, which can benefit your company if you expect the tax relief for depreciation of the vehicle to be greater than claiming capital allowances.
A growing sector, Salary Sacrifice schemes entail the employee buying the car overtime via a reduction in salary, and paying company car tax. As this can be subtracted from the employee’s gross salary before statutory tax deductions, they can save income tax and NICs. The benefit for the employee goes on, as they are given the opportunity to own a brand new car they might not readily be capable of purchasing outright, and maintenance, servicing, breakdown cover and insurance are usually included in the price, taking their worry away. Company Car Tax rates are as low as 5% on low emissions cars, so employees will pay significantly less tax by taking the car as a benefit rather than its equivalent in salary, in a 20% or 40% tax bracket.
Benefits for the employer include a lower Class 1A National Insurance bill, and attracting the best quality employers, for the long-haul, without increasing wages. The benefits involved in choosing low emissions vehicles also enhance the business’ green credentials. It’s not a great scheme for a company with high staff turnover, as if the vehicle would be returned early, there would potentially be early-termination fees to consider. It is also not the scheme to consider for a company with a high majority of minimum wage-level employees, as it’s unlikely to be cost-effective.
The main benefit to outright purchase is that the car belongs to the company from the get-go. The company thus assumes complete control over its use (as well as the maintenance and servicing). There will be higher tax implications, as tax-deductible capital allowances are only available on a maximum of 25% of the total price of the vehicle (or £3000, whichever figure is higher). It will be a regular draw on finances and is less routine and easy to budget for - but may be easier if you have high-value employees with high employee turnover rates.
Make sure to consider the employer tax implications. For example, some of the tax issues you’ll need to consider include National Insurance, Capital Allowances, Enhanced Capital Allowances, VAT, and Tax-Free Benefits. Making sure these values add up ensure you’re giving your employee a great perk rather than a financial burden.
Company car scheme tips to consider about choosing your car models? Consider the relevant needs of your employee, and that it is fit for purpose. Employees will pay tax on both the benefit and the fuel used, and the rate of tax is determined by the level of emissions the vehicle produces - so prioritise low CO2 emissions vehicles, to avoid higher tax charges.
Car Benefit rates range from 7% for the lowest emissions to 37% for the highest, with a further 3% levy on diesel engines (to the maximum 37%). The only reason an employee won’t pay car tax is if they earn under £8,500 pa including employee benefits, they got the car through an ECO scheme, or more than one employee jointly owns the car as part of a carpool.
As you can see, there are several aspects and approaches to consider when you’re wondering whether to start a company car scheme. Still, with diligent research into what suits your business best, this can be a financially rewarding business option for employers, as well as a financial- and morale boost for the employees concerned.