Car Benefit in Kind taxation 2024 to 2025: technical advice note

Tax Advice: The Welsh Government Energy Service does not provide tax advice. This technical note is an advisory and you should seek professional tax advice before committing to a particular course of action.

If an organisation provides a car for an employee and it does not qualify as a pool car (see below) it is a taxable benefit in kind (BIK) and is subject to both income tax and employer national insurance contributions (NIC). The taxation of company cars is significantly more complex than that of company vans (see separate TAN) as it is based on the list value of the car (known as the P11D value), its Original Equipment Manufacturer (OEM) published carbon dioxide emissions (gCO2/km) and, if it is a plug-in hybrid, its zero-emission range in miles.

Pool cars are exempt, but they must meet the following HMRC requirements:

• available for use, and is used, by more than one employee
• available to each employee because they need it to do their job
• not ordinarily used by one employee to the exclusion of others
• not normally kept at or near employees’ homes (unless near employers’ premises)
• used only for business journeys - limited private use is allowed, but only if it’s incidental to a business journey, for example driving home to allow for an early start the next morning

The table below shows the percentage (%) rate applied to the P11D value of the car to determine its taxable benefit. In 2024/25 the % rate to apply to a BEV will be 2% and this rises by 1% per annum to 5% in 2027/28. A plug-in hybrid with carbon dioxide emissions of 50 gCO2/km or less and a 45 mile zero emission range will start at 8% and rise to 11%.

The private use of fuel for company cars has a punitive rate of taxation and is rarely a real benefit. For 2024/25 the BIK value of free fuel is set at £27,800 which is then adjusted by the car’s BIK % rate and the employee pays income tax at their nominal rate of tax on this value while the employer pays NIC at the standard rate.

A driver of a fuel inefficient car with a long daily commute paying 20% tax may be able to offset the annual income tax paid against the cost of the fuel however the employer also has a significant NIC cost with no obvious benefit. Each litre of fuel purchased is subject to multiple layers of taxation (fuel duty, VAT, income tax and NIC) which can effectively double its price.

Staff should always reimburse the company for fuel used by private journeys, ideally using the actual energy efficiency (mpg) achieved in everyday use to calculate the rate (£/mile). This encourages fuel efficient driving for both private and business journeys.

Fuel (energy) cards provided for electric cars, providing they can only be used to purchase electricity are not a taxable benefit. If they are multi-purpose and can also be used to purchase petrol or diesel, they are a taxable benefit and incur the same £27,800 charge as ICE vehicles.

The following table shows the difference in taxation between an ICE and BE car of similar size. We have chosen a petrol hybrid car as this will be very fuel efficient (low gCO2/km = low tax rate) and have very low emissions of nitrogen oxides and particulates. It is an automatic with a continuously variable transmission – so it is comparable to a BEV in terms of its drivability.

The taxation of zero emission company cars is very favourable which is why sales of battery electric company cars (and salary sacrifice cars which are treated by HMRC as company cars) are so high. Even the energy – if purchased with an electricity-only fuel card – can be free.

There is no equivalent financial incentive for a private car owner to purchase an electric car as all the grants for both electric cars and home charge points have been withdrawn by OZEV. Even the home charge point provided for a company car by an employer is not a taxable benefit and the employee does not have to reimburse the employer if they leave the organisation.

Using the example above, after four years (from 2024/25 to 2027/28), the BIK % rate for the electric car will have incremented by 1% per annum from 2% to 5%. The total income tax and employers NIC paid during that time will be less than £1,500 even if an electricity-only fuel card with full private use is supplied with the vehicle.

Over the same period the total tax for just the ICE vehicle (no fuel) is £6,237 and with a fuel card and private fuel is an estimated £16,200 (depends on the annual inflationary increase in the BIK value of private fuel applied by HMRC).

It is also of note that the total BIK income tax and national insurance paid on the EV in this example is £199 in the first year, rising to £498 in 2027/28. This is significantly less than the ICE van BIK income tax and national insurance of £1,338/annum (HMRC may increase this in line with inflation).