Vehicle Expenses: Company Car vs Mileage Allowance for UK Businesses

TL;DR: Key Takeaways

Company cars offer convenience but incur Benefit-in-Kind (BIK) tax for employees and Class 1A NIC for employers.
Mileage allowance provides tax-free payments for business travel, offering simpler administration for employees.
Electric company cars benefit from significantly lower BIK rates, making them a tax-efficient option for businesses.
Capital allowances can provide substantial tax relief on vehicle purchases, especially 100% First Year Allowance (FYA) for zero-emission vehicles.

Choosing how to manage vehicle expenses is a critical decision for UK businesses, impacting both financial efficiency and employee benefits. The primary options — providing a company car or reimbursing employees for business mileage — each come with distinct tax implications, administrative burdens, and advantages. This guide delves into the intricacies of both, focusing on the 2026/27 tax year, to help you make an informed choice.

Company Car: The Perks and the Price Tag

A company car can be an attractive perk for employees, offering convenience and a sense of status. For employers, it can be a tool for recruitment and retention. However, these benefits come with a complex set of tax rules.

Pros of Providing a Company Car

Employee Convenience: Provides a reliable vehicle for business and personal use.
Employer Control: Businesses maintain control over vehicle choice, branding, and maintenance.
Tax Relief: Employers can claim capital allowances on the purchase and recover VAT on commercial vehicles (and sometimes cars).

Cons of Providing a Company Car

Benefit-in-Kind (BIK) Tax: Employees face BIK tax on the car's value, increasing their personal tax liability.
Employer Class 1A NIC: Businesses must pay Class 1A National Insurance Contributions on the BIK value.
Fuel Benefit Charge: If private fuel is provided, an additional tax charge applies.
Administrative Burden: Managing car fleets, insurance, and tax reporting can be complex.

Benefit-in-Kind (BIK) Tax on Company Cars (2026/27)

Benefit-in-Kind (BIK) tax is levied on the 'cash equivalent' of the benefit an employee receives from having a company car for private use. This is calculated by multiplying the car's P11D value (list price including VAT, delivery, and accessories, but excluding first-year registration fee and road tax) by a BIK percentage rate, which is primarily determined by the car's CO2 emissions and electric range.

How BIK is Calculated:

P11D Value × BIK Percentage × Employee's Income Tax Band

For example, a 20% taxpayer with a car with a P11D value of £30,000 and a BIK rate of 10% would pay £600 in BIK tax annually (£30,000 * 0.10 * 0.20).

Company Car BIK Rates (2026/27)

CO2 Emissions (g/km)	Electric Range (miles)	BIK Rate (2026/27)
0	N/A	3%
1-50	>130	3%
1-50	70-129	6%
1-50	40-69	9%
1-50	30-39	13%
1-50	<30	15%
51-54	N/A	16%
55-59	N/A	17%
60-64	N/A	18%
65-69	N/A	19%
70-74	N/A	20%
75-79	N/A	21%
80-84	N/A	22%
85-89	N/A	23%
90-94	N/A	24%
95-99	N/A	25%
100-104	N/A	26%
105-109	N/A	27%
110-114	N/A	28%
115-119	N/A	29%
120-124	N/A	30%
125-129	N/A	31%
130-134	N/A	32%
135-139	N/A	33%
140-144	N/A	34%
145-149	N/A	35%
150-154	N/A	36%
155+	N/A	37%

Diesel Car Surcharge:

A 4% surcharge applies to diesel vehicles that do not meet the Real Driving Emissions 2 (RDE2) standards, up to a maximum BIK rate of 37%.

Employer Class 1A National Insurance Contributions (NIC)

Employers are required to pay Class 1A National Insurance Contributions on the total value of the benefits in kind provided to employees, including company cars. For the 2026/27 tax year, the Class 1A NIC rate is 15%.

Fuel Benefit Charge (2026/27)

If an employer provides fuel for an employee's private use in a company car, a separate fuel benefit charge applies. This is calculated by multiplying a set fuel benefit multiplier by the car's BIK percentage. For 2026/27, the car fuel benefit multiplier is £28,200.

Example Fuel Benefit Calculation:

If a car has a BIK rate of 20%, the fuel benefit charge would be £28,200 × 0.20 = £5,640. The employee would pay tax on this amount at their marginal tax rate, and the employer would pay Class 1A NIC on it.

Van Benefit Charge (2026/27)

For company vans made available for private use, a flat-rate van benefit charge applies. For the 2026/27 tax year, this is £4,020 per year. If fuel is also provided for private use in a company van, a flat-rate van fuel benefit charge of £769 per year applies.

Zero-Emission Vans:

Zero-emission vans have a nil benefit charge, making them a highly tax-efficient option for businesses.

Mileage Allowance: Simplicity and Savings

For many businesses, particularly smaller ones or those with employees who use their own vehicles for work, reimbursing mileage can be a simpler and more cost-effective solution.

Pros of Mileage Allowance

Simpler Administration: Less complex than managing a fleet of company cars.
Tax-Free Payments: Payments up to Approved Mileage Allowance Payments (AMAPs) rates are tax-free for employees.
Employee Choice: Employees use their preferred personal vehicles.

Cons of Mileage Allowance

Employee Bears Costs: Employees initially cover fuel, insurance, maintenance, and depreciation.
Potential Under-Reimbursement: AMAPs might not fully cover actual running costs for high-mileage drivers.

Approved Mileage Allowance Payments (AMAPs) (2026/27)

HMRC sets Approved Mileage Allowance Payments (AMAPs) rates, which are the maximum tax-free amounts employers can pay employees for using their private vehicles for business journeys. Payments above these rates are taxable as earnings.

AMAPs Rates (2026/27)

Vehicle Type	First 10,000 Miles	Over 10,000 Miles
Cars & Vans	45p per mile	25p per mile
Motorcycles	24p per mile	24p per mile
Bicycles	20p per mile	20p per mile

Mileage Allowance Relief

If an employer pays less than the AMAPs rates, employees can claim Mileage Allowance Relief (MAR) from HMRC for the difference. This ensures employees are not out of pocket for business travel expenses up to the approved rates.

Capital Allowances on Business Vehicles

Capital allowances provide tax relief on certain business expenditures, including the purchase of vehicles. Instead of deducting the full cost of an asset in the year it's bought, capital allowances allow businesses to deduct a portion of the cost over several years, or sometimes the full amount in the first year.

Key Capital Allowance Rules for Vehicles:

100% First Year Allowance (FYA): For new and unused electric cars and cars with zero CO2 emissions, businesses can claim 100% of the cost as a deduction from their profits in the year of purchase. This is a significant incentive for adopting greener vehicles. This allowance is available if bought before April 2027 [1].
Main Rate Pool (18% Writing Down Allowance): Cars with CO2 emissions of 50g/km or less (that don't qualify for 100% FYA) are typically added to the main rate pool, allowing an 18% writing down allowance each year.
Special Rate Pool (6% Writing Down Allowance): Cars with CO2 emissions over 50g/km are usually placed in the special rate pool, with a 6% writing down allowance annually.

Important Note on AIA:

Cars do not qualify for the Annual Investment Allowance (AIA). However, other plant and machinery, including some commercial vehicles like vans and lorries, may qualify for AIA or full expensing.

Leasing vs. Buying a Business Vehicle

The decision to lease or buy a business vehicle has different financial and tax implications. Here's a comparison to help you weigh your options:

Leasing vs. Buying Comparison

Feature	Leasing (Contract Hire)	Buying (Outright/Finance)
Ownership	No, the leasing company owns the vehicle.	Yes, the business owns the vehicle (or will after finance is paid).
Upfront Cost	Typically lower, often a few months' rentals in advance.	Higher, requires a significant capital outlay or deposit.
Monthly Costs	Fixed monthly rentals, often including maintenance.	Loan repayments, plus separate costs for maintenance, insurance, and depreciation.
Tax Relief	Lease rentals are generally 100% deductible against taxable profits (50% for cars with private use).	Capital allowances on the purchase price; interest on finance can be deducted.
VAT	50% of VAT on car rentals is recoverable (100% on maintenance element if VAT registered).	VAT on purchase is generally not recoverable for cars (specific rules apply for commercial vehicles).
Flexibility	Return the vehicle at the end of the term with no disposal worries.	Freedom to keep, sell, or trade-in the vehicle at any time.
Depreciation	The risk of depreciation lies with the leasing company.	The business bears the risk of vehicle depreciation.

Conclusion

The choice between providing a company car and offering mileage allowance is not one-size-fits-all. It depends heavily on your business's specific needs, financial situation, and environmental objectives. Company cars, especially electric ones, can offer significant tax advantages and employee benefits, but come with administrative overhead. Mileage allowance provides simplicity and flexibility, shifting some costs and responsibilities to the employee.

Carefully consider the tax implications for both your business and your employees, the administrative burden, and the overall cost-effectiveness of each option before making a decision. Consulting with an accountant or tax advisor is always recommended to ensure compliance and optimize your approach to vehicle expenses.

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