We often get asked by clients whether getting a company car makes sense and is tax efficient. Long story short, in recent years the answer has been a cautious ‘yes’, but there are definitely aspects you’ll want to weigh up first. Everyone’s situation is different, so if you are considering a company car, read through the points below and then get in touch if you’d like to chat through your own situation.
The key facts
- The car must be registered in the company’s name. This shows that the company owns and uses it.
- There’s a personal tax impact. You (or your accountant) will need to declare a specially calculated amount of additional ‘income’ in your tax return. This is taxed like extra salary and is known as a taxable ‘Benefit in Kind’ (BiK).
- The company will receive capital allowances depending on the type of vehicle. This will lower the corporation tax bill. New electric cars get the best allowance.
- Cars are usually classified as assets in company accounts. They depreciate over time, usually longer than assets like phones or laptops, which have a shorter ‘useful economic life’ than a car (which would be expected to last five or more years, as opposed to a phone which is more likely to last around three years).
- Running costs can go through the company. Servicing, tyres, insurance and similar expenses can be paid directly by the business.
The recommended approach
The keywords are ‘electric’ and ‘new’. That’s where the real tax savings come in. If your car is not a brand new fully electric vehicle, then the tax efficiency quickly disappears and the car ends up as a tax burden rather than a nice perk. This is currently the case and will remain so until 31 March 2026. But HMRC may update these conditions after this date, so make sure you double check these rules with us.
New electric cars are not cheap, so you’ll need to review the cash in your company bank account and the overall position of the company to check if it’s affordable.
One thing to know about the BiK calculation: it’s based on the original list price of the car, not what you actually paid. So even if you snap up a bargain second-hand, HMRC will still calculate the tax as if the car were brand new.
These BiK percentages vary and can also change each tax year. The government can tweak them too, so it’s always worth checking the latest numbers before making a decision.
Purchase or lease?
If you’ve found a swanky new ride that you like the look of, then the company can either lease the car or purchase it outright. There’s broadly no difference in the tax/accounting treatment between these two options, but there are some differences worth knowing.
From the company’s perspective:
- Corporation tax relief applies on the cost of buying or leasing the car.
- The business can pay insurance, servicing and other running costs, and get tax relief on these.
- If the company owns the car (rather than leases) and the car is later sold, the sales proceeds are taxable within the company.
- No VAT is reclaimable if the car is purchased outright or under hire purchase (HP). For leased vehicles, the VAT reclaimable on the lease payments is restricted by 50%. (This means that every lease transaction in FreeAgent needs to be manually updated each quarter to correct the default 20% VAT reclaim in the software.)
- The company pays employer NICs (Class 1A) on the ‘benefit in kind’ value. This is 15%, as of April 2025, meaning there will be an extra annual payment to HMRC from the company’s account.
From your perspective:
You will pay extra income tax via the BiK mechanism (see above), which will need to be reported to HMRC via your Self Assessment return.
The BiK % for electric cars is currently 3% for 2025/26. This slowly started to increase in April 2025, and will increase by 1% each tax year until 2028. Here’s a full list of the planned percentage rises.
For example
Let’s say your limited company has a taxable profit of £150k in its latest accounting period, and you are following the remuneration structure we recommend (small salary topped up with dividends).
If the company buys a brand new, fully electric vehicle costing £50k, here’s the tax impact:
- £50k is deducted from the company’s taxable profits, reducing them to £100k. Corporation tax is then calculated on this lower figure.
- The BiK is calculated as £1,500 (£50k list price * 3%).
- The company pays £225 Class 1A NICs (£1,500 BiK * 15%) to HMRC.
- You suffer £300 extra personal tax liability (£1,500 * 20%) and your total taxable ‘income’ increases by £1,500 (the BiK) for the tax year in question.
A note on short-term leases and car clubs
Not every company car has to mean a long-term commitment. For some directors, it can be more practical to use short-term lease options, car clubs, or even occasional van hire for specific jobs or journeys. While these don’t usually bring the same kind of tax benefits as a brand new electric vehicle, they can give you flexibility without locking your company into a multi-year financial arrangement.
Other things to consider
P11Ds – these only apply if there’s a BiK. So, if you get a company car, you’ll definitely need to file one each year. We handle preparation and submission for existing clients as an additional service.
Future plan – think carefully about how long you expect to keep your company open. For example, if you sign a three-year lease but one year later decide to close the company (say you take a permanent role, your contract is deemed inside IR35, or you emigrate), you may face steep early exit fees.
Company cars can be a fantastic perk if set up in the right way – but they’re also a long-term commitment. For most business owners, the sweet spot is a new electric car, bought or leased through the company, with a full understanding of the tax and cash flow implications. If you have any questions about company cars, just get in touch, we’re happy to talk through your personal situation.
