As there have been a few changes over recent years, it seemed a good time to summarise where we are....

Once you know there are four taxes to consider producing very different results and HMRC has cars near the top of its enquiry topics, you’ll be keen to get it right.

How large are the tax differences?

BIG!

1. Income Tax & 2. National Insurance (NI) – Benefit In Kind - Between 4% and 37%

Charged on you by applying your income tax rate to the Benefit together with 15% NI charged to your company. The Benefit is based on the List Price regardless of the car’s age and what deal you struck.

3. Capital Allowances – Tax Relief - Between 6% and 100%

Your company claims this tax deduction when it purchases a car outright or under hire purchase.

4. VAT

Ordinarily no recovery at all but see further below for leases and vans.

Take two purchased company cars with a list price of £50,000:

New Unused Electric Car (EV)

• The 2026/27 Benefit In Kind is 4%:
• £50,000 × 4% = £2,000
• If you are a 40% taxpayer, the Income Tax cost is:
• £2,000 × 40% = £800 annual cost
• The company also pays Class 1A National Insurance:
• £2,000 × 15% = £300 annual cost
• At 25% corporation tax, the company saves tax in the year of purchase:
• £50,000 x 25% = £12,500 one off saving

Second Hand Petrol Car – Costing £30,000 - 150g/km CO2

• The 2026/27 Benefit In Kind is 36%:
• £50,000 x 36% = £18,000. It is irrelevant that you paid only £30,000.
• If you are a 40% taxpayer, the Income Tax cost is:
• £18,000 x 40% = £7,200 annual cost
• The company also pays Class 1A National Insurance:
• £18,000 × 15% = £2,700 annual cost
• At 25% corporation tax, the company saves tax on 6% of £30,000 in the year of purchase:
• £30,000 x 6% x 25% = £450 first year saving, less after that declining each year.
• NB It takes 27 years to get tax relief for only 80% of the £30,000! 

The differences are staggering:

• Income Tax - £6,400 higher annual cost
• Class 1A National Insurance - £2,400 higher annual cost
• Corporation Tax - £12,050 less saved in first year 

Admittedly, for the petrol car, further corporation tax is saved in later years but it’s so small and over so many years, it’s not helping you much!

Other Benefit In Kind rates that apply to petrol/diesels range from 17% to 37%, depending on CO2.

Hybrids (PHEV) with 1-50g/km CO2 from 4% to 16%, depending on electric range or if deemed 1g/km due to the new Euro 6e-BIS emission regime. 

Benefits In Kind can be reduced by making a capital contribution of up to £5k to reduce the applicable list price. On the other hand, accessories can increase the list price. 

Fuel paid for private journeys would create a further expensive Benefit In Kind increasing the disadvantage of the petrol car further. 

Corporation tax relief can be at 14% instead of 6% but even at 14% it takes 11 years to get tax relief on 80% of the cost!

Tip: Hybrid (PHEV) Benefit In Kind rates are climbing to 18% at all electric range levels from April 2028, only 18 months away, so ensure you account for that in your calculations.

EV Running Costs Advantages

Charger

In addition to the advantages of a new EV above, a company EV charger can be ordered by your company and installed at your home with no Benefit In Kind cost, full capital allowances tax relief at 100% and full VAT recovery claimed.

Full capital allowances relief and VAT recovery assumes the invoice is in your company name and the charger remains company property. Invoices addressed to you as owner-director can bring into question whether the charger is entirely a business asset.

Regular use by another private EV at your home should restrict the VAT reclaim by an appropriate proportion but it’s unlikely that the capital allowances claim is affected where the charger is purchased as part of providing you with a company car.

Charging up

All costs of charging at home or out and about can be claimed as an expense even for private journeys.

The amount claimed can be based on actual costs incurred or your company can pay you the current rates of 7p per business mile for home charging/15p per mile for public charging, without a Benefit In Kind on you.

However, VAT is different. VAT charged (if any) on a domestic electricity supply cannot be reclaimed at all. VAT charged out and about on a public charger can be reclaimed for business journeys as long as there are records of the business journeys.

Therefore, there is no recovery for the 7p domestic rate, but the VAT element of the 15p public rate = 2.5p can be reclaimed with appropriate evidence.

Should I use my own car and charge the company 55p per business mile?

When you’re clear about the taxes that apply, you can make a clear comparison between owning your own car and charging your company 55p per business mile (up to 10,000 miles a year), 25p after that (NB For NI there is no 10,000 miles limit).

Your company saves corporation tax on 100% of the 55p and reclaims VAT of a few pence on the fuel element of the 55p with no taxable Benefit In Kind on you.

If you’re happy with an older car, this can work well as long as it doesn’t turn out to need a lot of repairs! Or if you don’t drive many private miles.

We are happy to carry out these comparison calculations for you.

Tip: From April 2028, EVs and PHEVS will be subject to a mileage-based VED (eVED) based on 3p per mile for EVs and 1.5p per mile for PHEVs in addition to the current VED road tax. Ensure you account for this in your calculations. It’s not yet known whether the 55p per business mile will be increased accordingly.

Can I have a company van?

Generally, a van is more tax efficient because:

1. Home to work commuting journeys don’t create a Benefit In Kind.
2. Other insignificant private use doesn’t create a Benefit In Kind.
3. For VAT, incidental private use is tolerated potentially allowing 100% to be reclaimed. 

What is a van?

The different taxes have different definitions – naturally!

HMRC Income Tax/National Insurance/Capital Allowances look essentially at the main purpose.

If it’s primarily for goods, then it’s a van. HMRC VAT looks at it from the other direction but is a similar idea. However, it also refers to whether side windows exist or could exist. For HMRC VAT, all of this is ignored if the payload is one tonne or more.

For example, it has been decided that usually a double cab pick-up is designed primarily for carrying passengers and is therefore a car. Whereas a single cab pick-up is usually designed primarily for carrying goods and is therefore a van. On the other hand, if the payload is at least a tonne, then HMRC VAT define a double cab pick-up as a van therefore creating different tax conclusions for the same vehicle between different HMRC departments!

For many models of van-type cars, it can be difficult to know what side of the line the vehicle sits. Any lists of vans and cars are usually out of date as new models arrive on the market.

Tip: Either way, do not rely on the V5C or the salesperson!

Tip: Purchases and leases of double cab pick-ups before April 2025 usually retain favourable Benefit In Kind van treatment until April 2029, unless you dispose of it or the lease expires before April 2029. If you want to have a new vehicle before then pass it on to an employee to keep the van treatment. 

Lease or Buy?

On top of this, there is the lease or buy decision.

If you have spare cash in the company not earning much interest and not earmarked for investment or a project, buying a car outright is likely to make sense.

If cash is tight, consider Hire Purchase or a lease. The same tax treatment as an outright purchase applies to a Hire Purchase; it’s essentially taking out a loan to buy the car so that capital allowances are available.

The tax treatment of leases is different. For example, if you’re VAT registered leasing a company car can be attractive because you also get to reclaim 50% of the VAT charged.

Aside from VAT, company tax relief for leases is essentially the cost of the car plus interest over time which under new accounting rules provide tax relief for the interest and depreciation charged in the accounts even for operating leases (now required to be included in fixed assets). However, where CO2 emissions are over 50g/km the depreciation and interest is restricted to only an 85% deduction.

In between HP and operating leases, you have business contract purchases (BCP) and other similarly named leases, whose tax treatment will mostly be determined by the final payment or Guaranteed Future Value (GFV), also known as a balloon payment.

If the GFV is less than expected market value, it’s more likely to be closer to a Hire Purchase arrangement. If it’s about the same as the expected future market value, it’s more likely closer to a finance lease. If it’s higher, it’s closer to an operating lease. A close analysis of the contract is required. Do not rely on the heading of the contract as this can be misleading.

It’s worth noting that operating leases can work well for EVs because the technology is changing fast and you can easily upgrade to a car with a new battery at the end of a short lease

Long funding leases – often over 7 years - are similar to a Hire Purchase and therefore not restricted to an 85% deduction.

TIP: 100% VAT can be reclaimed on maintenance and service charges in a leasing contract. Ensure these are shown separately where they apply.

What general themes are there?

If tax relief is valuable to you and you prefer or don’t mind an electric car, a new company electric car may be a tax efficient option. There is a lot of choice, not all of them very expensive.

On the other hand, if you have few profits or a tax loss, you prefer a petrol/diesel, can’t afford a new car and don’t drive excessive private miles, a personally owned second hand car is likely a good option by simply charging your company 55p per business mile.

Please note:

• All figures are based on the 2026/27 tax year ended 5 April 2027 or to 31 March 2027 for companies.
• Electric business mileage rates of 7p and 15p may change in future quarters.
• Benefit In Kind percentages are increasing in later years.
• Interactions between dividend tax and Benefit In Kind tax can make income tax higher.
• Claims, reliefs, charges are subject to their usual set of detailed rules. For example, even a VAT registered business may not be able to reclaim 100% VAT if you are a partially exempt business.
• Tax treatments can be significantly improved if there is a genuine pool car.

As there are many moving parts take appropriate professional advice on your particular situation before making any decisions.