If I were to create a hit list of questions asked by clients, the one that would be in our top 3 would be around company cars and company car tax implications.
A company car is often seen as a desirable perk — but in reality, whether it’s a good idea depends on who you are and the role you play. I’m going to break it down into three key scenarios.
Understanding Company Car Tax: Employees vs Directors
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When You’re an Employee
If your employer offers you a company car, you’ll want to understand the personal implications.
- Tax (Benefit in Kind): You’ll pay extra income tax on the car, based on its list price and CO₂ emissions. Company car tax rates are much lower for electric vehicles than for petrol or diesel. You can check the details with HMRC here.
We have written a blog all about electric cars, which you can read here: DNA blog on electric cars
- Fuel: If your employer pays for private fuel, it’s heavily taxed and rarely worthwhile.
- Costs: Servicing, MOT, and insurance are usually covered, which makes life easier.
- Flexibility: You may not have a choice of car model, and you’ll need to hand it back if you leave.
Rule of thumb: Company cars are attractive if they’re low-emission (especially electric) and if you want hassle-free motoring.
Otherwise, you might be better off with a car allowance, taking extra salary (which will be subject to tax and national insurance) to buy or run your own car, especially if you prefer second-hand or low-cost cars.
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When You’re an Employer
Providing a company car can be a powerful recruitment and retention tool, but there are business and compliance angles to consider.
- Costs to you: Lease or purchase costs, running expenses, and Class 1A National Insurance (15% of the benefit value). This is the true employer cost of providing a company car.
- Tax deductions: Lease payments and running costs are deductible, and electric cars may qualify for enhanced reliefs.
- HR impact: Decide whether to offer cars to all staff or just certain roles. A clear company car policy for staff avoids disputes about fairness, fines, or private use.
- Alternatives: Some staff may prefer a cash allowance instead, which can be more flexible and less admin-heavy but will be subject to PAYE and NIC deductions and costs.
Rule of thumb: Company cars can be worthwhile as part of a benefits package, but think carefully about whether low-emission options or a cash allowance would work better for your team.
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When You’re a Director of Your Own Company
This is where the decision becomes a real tax planning exercise. You’re wearing two hats: employer and employee.
- The tax cost: You’ll personally pay tax on the Benefit in Kind, and the company will pay Class 1A NIC.
- When it works: Electric cars are usually very efficient — low BIK rates, deductible running costs, and the company can even fund a charging point. This is why many clients ask: “Is an electric company car tax efficient?” The answer is usually yes.
- When it doesn’t: Petrol and diesel cars usually work out tax inefficiently, especially if the company also pays for private fuel.
- Alternative approach: Many directors ask whether a company car or mileage allowance for directors is the smarter choice. Often, it’s better to own the car personally and claim mileage at HMRC’s approved rates (45p for the first 10,000 miles, 25p thereafter).
Rule of thumb: For directors, company car vs personal car calculations nearly always favour electric cars through the company, but petrol/diesel cars are often better owned privately with mileage claimed back.
Leasing vs Buying – Which is Better for the Company?
One of the biggest decisions for employers and directors is whether the company should lease or buy a company car. Each option has its advantages and disadvantages.
Leasing a Company Car
Advantages:
- Lower upfront costs compared to buying outright.
- Fixed monthly payments make budgeting easier.
- Often includes maintenance packages, reducing admin.
- Access to newer cars more frequently (typically every 2–4 years).
- Leasing costs are usually deductible for corporation tax purposes.
Disadvantages:
- You never own the car — it must be returned at the end of the lease.
- Mileage limits can apply (excess mileage charges can be steep).
- End-of-lease penalties due to dents or scuffs are punitive.
- If you exit the lease early, there are penalty charges.
Buying a Company Car
Advantages:
- The company owns the asset — no restrictions on mileage or use.
- Possible to claim capital allowances (more generous for low-emission/EVs).
- You can keep the car as long as you like, with no contractual tie-ins.
- Resale value belongs to the company.
Disadvantages:
- Large upfront cost, which can affect cash flow.
- Cars depreciate quickly — value on resale may be low.
- All maintenance, servicing, and repair costs sit with the company.
- Less flexibility if tax rules change (e.g. if BIK rates rise sharply).
For some directors, the tax benefits of buying a company car outweigh leasing, especially for electric vehicles, where capital allowances are generous.
Rule of thumb:
- Leasing is often better for cash flow and flexibility, especially for businesses that want predictable costs.
- Buying can work if the company has strong cash reserves, wants to keep the car long-term, or is purchasing an EV.
Final Thoughts
There’s no one-size-fits-all answer to the “company car” question. The right decision depends on:
- What type of car you want
- How much you drive for business
- The company’s cash position
- Whether leasing or buying makes more sense for your circumstances
- Your wider tax position
If you’re weighing up the options, we can help you work out the numbers and see which route is most tax-efficient for your situation.
Need advice? Get in touch with us at DNA Accountants — we’ll help you decide whether a company car, a cash allowance, leasing, or buying is the best fit for you or your business.