The company car is the lifeblood of the motor finance sector and a vital tool for thousands of businesses.
Usually made available by an employer to their employee for business and/or personal travel, company car schemes include pool cars and those allocated to an individual either as an employee benefit or a job requirement. It includes cars that qualify for Benefit-in-Kind (BiK) tax and those that don’t, for example when there is no private use or because the employee makes a financial contribution that zeroes the tax liability.
Beyond offering a sought-after employee benefit, company car schemes are also bringing cleaner, greener vehicles to UK roads. Low company car tax rates are pulling people into electric vehicles and accelerating progress to Net Zero, allowing businesses and their employees to play their part.
The low tax rates are particularly important for the burgeoning salary sacrifice market where BVRLA members, who operate in the vehicle leasing and rental sectors, are helping thousands of basic-rate taxpayers access a new battery electric vehicle for the first time.
Sustainable solutions in a cost-of-living crisis
As we weather the cost-of-living crisis, drivers need to know what their tax bills will be. Alongside this, both employers and employees want to move towards sustainable solutions for their company cars that reduce their running costs and reduce their carbon footprint.
To support this and protect the long-term health of the electric company car market, the BVRLA ran its #SeeTheBenefit campaign through 2022. The activity called for electric company car tax rates to remain low and for the market to be given clarity on future rates. Clarity and consistent costs bring confidence. Those asks were met, with Chancellor Jeremy Hunt announcing that the Benefit-in-Kind (BiK) rate for electric vehicles (EVs) would increase by just 1% a year from 2025 for three years.
The 2% BiK rate (until 2025) for EVs has enabled large and small employers all over the UK to open access to greener, more efficient, and cheaper salary sacrifice cars to their employees. Supermarket workers, airline staff, hospitality staff, doctors, nurses, and many others who keep the UK running have now been able to make the switch to new, safe, zero-emission cars. EVs are still on average 36% more expensive than petrol or diesel equivalents. That difference is closing, and the current company car tax structure is helping drivers to bridge the gap.
Around 60% of salary sacrifice drivers are basic-rate taxpayers. For most people to be able to shift to EVs they need lower cost, accessible, finance options. With no deposit and a single monthly payment taken from pre-tax earnings, salary sacrifice schemes are providing exactly that. It is vital that alongside progress to transport decarbonisation, employees can maintain their mobility.
Popular alternatives to salary sacrifice
Most company cars are leased, giving businesses peace of mind and providing consistent, clear costs. With contract hire agreements, monthly payments are known upfront and the package usually includes road tax (where appropriate) and breakdown recovery. Leasing companies or brokers may also offer packages that include servicing, maintenance or insurance, reducing the administrative burden on the employer providing the vehicle.
Contract hire is the most popular arrangement for company cars in the UK. It gives employers control and convenience, simultaneously offering employees the freedom to choose a vehicle that matches their lifestyle.
Another way in which company cars are financed is on a cash allowance. Companies that don’t necessarily need to control what their employees are driving, and don’t want to run a fleet themselves, will give eligible drivers a lump sum every month to spend at their discretion. Some employers set parameters around age and type of car, and sometimes there’s a free choice. The decision rests with the employee, which can result in older vehicles being used for business use.
A pool car or van is a company vehicle that’s available for use by one or more employees of that company for business use. The frequency with which pool vehicles are used is often scrutinised by HM Revenue & Customs, with the aim of avoiding pool cars being used as an individual’s regular company vehicle to sidestep company car tax.
Reasons for choosing a company car
Regardless of the route or scheme selected, providing a company car scheme to colleagues is likely to bring benefits to the employer too. These may include reduced National Insurance contributions – via salary sacrifice – as well as boosting morale amongst staff and strengthening recruitment strategies. Schemes that favour EVs also support an employer in furthering their positive environmental credentials, while ensuring their employees have access to the safest, greenest vehicles possible.
Toby Poston is director of corporate affairs at BVRLA