Providing Company Cars to Employees: What Employers Should Know
For jobs where an employee depends on spending time out of the workplace, companies have 2 options. One is to reimburse the employee for the use of their private vehicle or to offer a company owned vehicle. Today we will explore the impacts for both employees and employer when a company vehicle is made available to an employee.
Tax Implications of Company Cars
The Revenue understands that when a company provides a car to an employee, apart from the business travels, the employee will benefit from the private use of that vehicle. It can be in the regular commute to work (considered private use) or a trip that is unrelated to the business. That’s why company cars are classified as a Benefit in Kind (BIK) and are subject to income tax and Class 1A National Insurance Contributions.
Electric Vehicles: For electric vehicles, BIK rates are significantly lower, making them a cost-effective choice for both employers and employees. From April 2025, the rates will rise to 5% for fully electric vehicles, but they remain much lower than traditional cars.
Mileage expenses reimbursement
When an employee uses their private vehicle to a business travel, HMRC allows the reimbursement to be calculated based on the Authorised Mileage Allowance Payment (AMAP), that currently (2024/2025) is £0.45 per mile for the first 10,000 miles and £0.25 per mile thereafter (within the tax year). This rate supposedly covers the costs of fuel and wear and tear of the vehicle.
If the vehicle is a company car, the cost to cover should be only related to fuel costs. For this reason, HMRC sets quarterly the Advisory Fuel Rates (AFRs), that specifies the maximum rates that an employer can reimburse an employee for business travels; or the rate that an employee repays the cost of private fuel to the employer. The AFRs can be found in the link HMRC Advisory Fuel Rates.
If an employer makes a payment to an employee in relation to fuel for private use, this should not be included in payroll. Instead, it should be taxed as a benefit. If the employer provides any amount in excess of the actual fuel cost (being the advisory fuel rates or another rate agreed with HMRC by the employer) for business mileage, the excess should be included in payroll and subjected to both tax and Class 1 NIC. These examples are called Fuel benefit charge. However, electric vehicles, or when the fuel is only available for business purposes, and where the employee repays back the cost of the fuel provided are exempt from Fuel Benefit charge.
