Business car leasing tax implications explained

Providing electric cars as company cars is becoming an increasingly popular way for forward-thinking businesses to attract top talent, and can carry some useful tax benefits for the employer too.

However, the tax implications of business car leasing can be quite complex, so it’s essential to know how to apply the rules to calculate employee benefits in kind and the tax you need to pay on them.

This article is not financial advice — you should consult your qualified company accountant to be sure of how the rules apply to you. However, we’ll look at some of the general tax implications of business car leasing to help you understand some of the issues that might apply to you.

What Is Company Car Tax?

Company car tax is the tax you must pay as a employee when your company provides you with a company car er. It’s based on the car being treated as a benefit in kind, because the vehicle is considered a benefit which has a cash equivalent value for the driver.

The rules apply to all types of company cars, although traditionally, all-electric cars have been subject to a reduced tax rate in order to encourage up-take of electric vehicles. In 2020-21, battery electric vehicles had a zero tax rate as company cars, but more recently, that rate has started to creep up — more on that below.

In general, company car tax is calculated based on the type of fuel the vehicle uses, its CO2 emissions, and the vehicle’s list price when new.

BEV Company Car Tax Rates

As of 2023-24, the headline rate of company car tax rate for electric vehicles stands at 2% of the car’s list price (also called its P11D value).

This is set to increase in the years to come but will remain in the low single digits for some time:

• 3% in 2025-26
• 4% in 2026-27
• 5% in 2027-28

By keeping the rate low and only slowly raising it, employers can have some confidence that the tax bill for electric company cars will remain low for the immediate future.

For hybrid vehicles, the taxable rate is based on the vehicle’s emissions and its electric range in miles. Emissions must be below 50g CO2 per km to qualify for a reduced tax rate. For qualifying vehicles, the tax rate is set as follows based on the maximum electric range:

• 14% less than 30 miles
• 12% 30-39 miles
• 8% 40-69 miles
• 5% 70-129 miles
• 2% 130 miles and over

If a hybrid vehicle has emissions of more than 50g CO2 per km, it is treated as a standard petrol or diesel vehicle for the purposes of calculating company car tax.

Petrol And Diesel Company Car Tax Rates

The full list of company car tax bands for petrol and diesel vehicles has 25 different bands, and they’re subject to change annually, so always check the latest guidance from the UK Government when making your calculations.

For reference, in 2023-24, the bands range from:

• 15% for emissions of 51-54g CO2 per km
• 37% for emissions of 160g and above

It’s worth noting that the CO2 figure is rounded down to the nearest multiple of five, so emissions of 128g would be treated as 125g. In general, this is factored into the bands — e.g. 128g would be in the band 125-129g anyway.

How To Calculate Company Car Tax

Now we have an idea of how to find the benefit in kind rate (BIK rate) for your vehicle, how does this equate to an amount of payable tax?

To calculate company car tax:

• Take the P11D value, including the list price, VAT, and delivery charges
• Multiply by the BIK rate (as determined by engine type and emissions)
• Multiply by the employee’s personal tax rate

Any tax owed under this calculation is usually deducted from the employee’s pay via PAYE and any other tax liabilities.

Examples

The following examples are based on a standard-rate taxpayer subject to an income tax rate of 20% on their company car benefit.

1. A petrol car with P11D value of £20,000 and emissions of 75g has a BIK rate of 20% (based on 2023-24 bands) therefore:

• £20,000 x 20% x 20% = £800 company car tax p.a.

2. An electric car with P11D value of £20,000 and emissions of 0g has a BIK rate of 2% (2023-24) therefore:

• £20,000 x 2% x 20% = £80 company car tax p.a.

If the individual earns more than the higher rate tax bracket (approx. £50,000 but subject to change annually), the tax on their company car should be adjusted accordingly. For example, for 2023-24, the figures would double from 20% to 40%.

N.B.: Company vans are subject to different rules. In 2023-24 they are charged at a standard P11D value of £3,600 for petrol/diesel vans, which is reduced to £0 for vans with zero emissions.

Can I Tax-Deduct Business Car Lease Payments?

In some circumstances, employers can offset business car lease payments against corporation tax liabilities — again, ask your business accountant if you need to know more about whether you are able to do this.

The vehicle’s emissions may be considered when determining this

Since April 2021, the rules have tightened considerably, and now the following brackets apply to what you can claim:

• New zero-emission vehicles (including electric cars): 100% first-year allowances
• Second-hand electric cars: Main rate allowances
• New/second-hand vehicles 50g or less CO2 per km: Main rate allowances
• New/second-hand vehicles over 50g CO2 per km: Special rate allowances

You may also be able to claim back the VAT payable on your business car leasing payments at the following rates:

• 100% for vehicles used purely for business purposes
• 50% for vehicles also used for personal purposes

Together this can add up to significant tax deductions for businesses that provide company cars as an employee benefit.

Final Thoughts

The rules that apply to calculating company car taxes – including benefits in kind, leasing costs, and VAT are complicated, and you should always double-check your calculations with a qualified accountant.

Once you’re familiar with those rules, the actual calculations are not too complex, and the tax-deductible entitlements for employers can lead to some substantial offsets against your corporation tax bill.