Taxation of company cars in 202425

Company cars continue to be one of the most complex and sometimes misunderstood areas of UK tax planning. Whether you’re a director running a small business or an employee receiving a vehicle as part of your remuneration package, understanding how HMRC taxes company cars in 2024–25 could save your business thousands of pounds annually. At Severn Accounting, we regularly help Worcester-based businesses and their directors navigate these rules, so let’s break down what you need to know.

How company car benefit is calculated

When your company provides you with a vehicle, HMRC treats it as a taxable benefit. The benefit is calculated using the “benefit-in-kind” method, which is based on the car’s list price and a percentage rate that depends on the vehicle’s CO₂ emissions.

The formula is straightforward: benefit = list price × benefit percentage. For 2024–25, the benefit percentages remain unchanged from previous years, ranging from 11% for ultra-low-emission vehicles (0–50g CO₂/km) up to 37% for petrol cars emitting over 225g CO₂/km. Electric vehicles (0g CO₂/km) sit at the lowest rate of 11%, making them increasingly attractive for tax-conscious businesses.

It’s important to note that only the list price matters—not what you actually paid for the car. Accessories that are permanently fitted count towards the list price, but maintenance and fuel costs are usually irrelevant to the calculation (unless your company is covering fuel, which is taxed separately).

Fuel benefit: a separate consideration

If your company pays for fuel for private use, you face an additional taxable benefit. The fuel benefit is calculated as: fuel benefit = fuel benefit amount × benefit percentage (based on CO₂ emissions, as above).

For 2024–25, the fuel benefit amount is £27,800. So if you drive a petrol car emitting over 225g CO₂/km and your employer covers private fuel, the taxable benefit would be £27,800 × 37% = £10,286. This is a significant amount, which is why many employees and employers opt for “fuel capping” arrangements, where the employee reimburses the company for fuel used.

Many directors we advise choose to pay for their own fuel to avoid this substantial tax liability. It’s a practical way to reduce your tax bill, especially if your journeys are predictable.

Capital Allowances and company obligations

From the company’s perspective, vehicles don’t qualify for standard capital allowances in the way machinery or equipment does. However, companies can claim full expensing (100% first-year allowance) on eligible vehicles up to certain thresholds, subject to the plant and machinery rules.

More importantly, companies must comply with Companies House and HMRC requirements. You need to keep comprehensive records of private versus business usage, as well as detailed mileage logs if you’re making apportionment claims. These records are essential if HMRC ever queries your tax position.

Minimising your company car tax bill

There are several straightforward strategies to reduce the impact:

Switch to ultra-low-emission vehicles: The 11% benefit for electric vehicles and plug-in hybrids is significantly lower than conventional cars. Many of our clients have found the switch financially worthwhile when the tax saving is combined with lower running costs.

Use salary sacrifice schemes: If your employer operates an approved salary sacrifice arrangement, you may be able to reduce your gross taxable income by the amount of the benefit. This can provide National Insurance savings too.

Reimburse fuel costs: As mentioned, covering your own petrol or diesel removes the substantial fuel benefit charge.

Maintain accurate records: Being able to evidence that some journeys are genuinely non-business use could allow apportionment, though HMRC is increasingly strict about this.

Planning ahead for 2025–26

Whilst we’re currently in the 2024–25 tax year, it’s worth noting that these benefit percentages are reviewed annually. Electric vehicles currently enjoy the lowest rate, but this position may change in future years. If you’re considering a company vehicle, it’s worth getting professional advice tailored to your circumstances.

Company car taxation isn’t static, and individual situations vary enormously. A solution that works brilliantly for one director might not suit another, depending on their driving patterns, business structure, and personal circumstances.

For tailored advice on your company car situation—whether you’re restructuring your remuneration package, considering a fleet change, or simply want to ensure you’re not overpaying tax—we’d recommend a consultation with your accountant. For tailored advice, contact Severn Accounting — we’re here to help.