Company car decisions will affect more than one person in a business.
Drivers may focus on Benefit-in-Kind. Employers may focus on National Insurance. Business owners and accountants may focus on capital allowances and corporation tax relief.
This means that choosing a company car involves more than comparing price lists, lease rentals or monthly running costs.
But the overall tax position of a company car can vary significantly depending on its P11D value, CO2 emissions, fuel type, electric range and capital allowance treatment.
Electric company cars are particularly important because they may combine low Benefit-in-Kind percentages with 100% first year allowances, giving a favourable result for both the driver and the business.
This guide explains how company car tax, employer National Insurance, capital allowances and corporation tax relief fit together.
DriveSmart provides factual comparison data to help users compare vehicles. It does not recommend cars or rank vehicles as best or worst.
All Company Car Tax And Capital Allowances Calculator
Why Compare Company Car Tax And Capital Allowances Together?
Looking at only one part of the tax calculation can give an incomplete picture.
A vehicle may have a relatively low purchase price but a high taxable percentage. Another vehicle may be more expensive but produce lower company car tax and better capital allowance treatment.
Comparing these items together helps show the wider tax position for both the employee and the business.
So, What Is Company Car Tax?
Company car tax is a Benefit-in-Kind charge that applies when an employee or director has a company car available for private use.
The taxable company car benefit is normally calculated using:
- The vehicle's P11D value
- The taxable percentage of list price
- The relevant company car tax rules for the tax year
In simple terms:
- P11D Value × Taxable Percentage = Annual Company Car Benefit
- Annual Company Car Benefit × Income Tax Rate = Annual Company Car Tax
The taxable percentage is strongly influenced by CO2 emissions, fuel type and, for many plug-in hybrid cars, electric-only range.
And What Is Employer Class 1A National Insurance?
Employers normally pay Class 1A National Insurance on taxable company car benefits.
This means the employer cost is linked to the annual Benefit-in-Kind value, rather than simply the price of the vehicle.
A lower taxable benefit can therefore reduce the tax cost for the employee and the employer National Insurance cost for the business.
This is one reason why electric company cars are often attractive in company car schemes, salary sacrifice arrangements and director-owned businesses.
And Finally, What Are Capital Allowances?
Capital allowances are the tax rules that decide how a business receives tax relief for the cost of buying plant and machinery, including many business vehicles.
For company cars, the business cannot normally deduct the full cost of the car from taxable profits immediately unless the vehicle qualifies for a specific first year allowance.
Instead, tax relief is usually spread over a number of years using writing down allowances.
Capital allowances affect the business rather than the employee. They help determine the timing of corporation tax relief on the vehicle cost.
Electric Company Cars And 100% First Year Allowances
New zero-emission company cars can currently qualify for 100% first year allowances.
This means the full qualifying cost of the vehicle may be deducted against taxable profits in the accounting period in which the vehicle is purchased.
For a company paying corporation tax, this can accelerate tax relief compared with vehicles that only qualify for writing down allowances.
The availability of 100% first year allowances can be one of the most important tax differences between a new electric company car and a petrol, diesel or hybrid company car.
Electric company cars may therefore provide two separate tax advantages:
- Lower Benefit-in-Kind taxation for the employee or director
- Accelerated capital allowance relief for the business
Writing Down Allowances For Company Cars
Where a company car does not qualify for 100% first year allowances, tax relief is usually given through writing down allowances.
Writing down allowances spread tax relief over more than one year. The allowance is calculated on the remaining tax written down value, so the amount of relief normally reduces each year.
For company cars, the applicable capital allowance rate depends on the car's CO2 emissions and the date of purchase.
Current company car capital allowance treatment is broadly based around:
- 100% First Year Allowance for qualifying new zero-emission cars
- Main Pool Writing Down Allowance for qualifying lower-emission cars
- Special Rate Pool Writing Down Allowance for higher-emission cars
The main writing down allowance rate changed from 18% to 14% from April 2026. The special rate writing down allowance remains 6%.
Where an accounting period straddles a rate change, a hybrid or transitional rate may be required.
Capital Allowances And Corporation Tax Relief
Capital allowances reduce taxable profits.
For a company, lower taxable profits can reduce corporation tax. The value of that tax saving depends on the company's corporation tax rate, profits and overall tax position.
The timing of tax relief can be just as important as the total amount of relief.
A 100% first year allowance can provide tax relief much sooner than a writing down allowance spread across several years.
For example, if a qualifying new electric company car costs £40,000, a 100% first year allowance may allow the business to deduct the full qualifying cost against taxable profits in the year of purchase.
By contrast, a petrol, diesel or hybrid car may receive relief more slowly through writing down allowances.
Understanding each of these items individually is useful, but many businesses need to compare them together when choosing a company car.
Want to compare company car tax, employer NIC and capital allowances side-by-side?
Compare Company Car Tax And Capital Allowances
Company Car Tax Versus Corporation Tax Relief
Company car tax and corporation tax relief are different calculations.
Company car tax is based on the taxable benefit provided to the employee or director. Corporation tax relief is based on the tax treatment of the vehicle cost for the business.
A company car can therefore produce different results for different stakeholders.
- The employee may focus on annual company car tax
- The employer may focus on Class 1A National Insurance
- The business may focus on capital allowances and corporation tax relief
- The finance director may focus on cash flow and whole-life cost
A useful company car comparison should therefore consider both the driver tax position and the business tax position.
Electric Cars, Hybrids, Petrol And Diesel Cars
Different fuel types can produce very different company car tax and capital allowance results.
Fully electric cars normally have zero tailpipe CO2 emissions and may qualify for 100% first year allowances when bought new and unused.
Plug-in hybrid vehicles may produce lower company car tax than some petrol or diesel cars, but they will not necessarily qualify for 100% first year allowances.
Petrol and diesel vehicles may be subject to higher Benefit-in-Kind percentages and slower capital allowance relief depending on their CO2 emissions.
This is why it can be useful to compare company car tax, employer NIC and capital allowances side-by-side rather than looking at the vehicle price alone.
Company Cars And Vans Are Not The Same
Company cars and company vans are treated differently for tax purposes.
Vans may qualify for different capital allowance treatment, including Annual Investment Allowance where the conditions are met.
Company van Benefit-in-Kind rules are also different from company car Benefit-in-Kind rules.
This page focuses on company cars. Vans should be considered separately using van-specific tax and capital allowance guidance.
Compare Company Car Tax And Capital Allowances
DriveSmart is developing company car comparison tools that bring together vehicle taxation, emissions, Benefit-in-Kind and business tax relief information.
A company car tax and capital allowances search can help users compare:
- Manufacturer and model
- Fuel type
- CO2 emissions
- P11D value
- Benefit-in-Kind percentage
- Annual taxable benefit
- Estimated company car tax
- Employer National Insurance
- Capital allowance treatment
- First year allowance eligibility
- Writing down allowance rate
- Corporation tax relief indicators
This gives employees, employers, accountants, directors and business owners a broader view of the overall tax position.
Search For Company Cars
Salary Sacrifice And Electric Company Cars
Salary sacrifice is another area where company car tax and capital allowances can interact with wider business decisions.
Under a salary sacrifice arrangement, an employee gives up part of their gross salary in exchange for a company-provided car and associated services.
Electric cars are frequently considered in salary sacrifice schemes because of their Benefit-in-Kind treatment.
The employee may focus on the salary reduction and company car tax. The employer may also consider National Insurance, scheme administration, vehicle cost, running costs and capital allowance treatment.
Company Car Running Costs
Tax is only one part of a company car decision.
Fuel or electricity, servicing, maintenance, tyres, insurance, depreciation and charging arrangements can all affect the overall cost of running a vehicle.
Comparing company car tax and capital allowances with running costs can provide a more complete view of the vehicle's financial position.
Frequently Asked Questions
What is the difference between company car tax and capital allowances?
Company car tax affects employees and directors who have private use of a company car. Capital allowances affect the business and determine how tax relief is obtained on the cost of buying the vehicle.
Do electric company cars qualify for 100% first year allowances?
New zero-emission company cars can currently qualify for 100% first year allowances, allowing the qualifying cost to be deducted against taxable profits in the year of purchase.
What are writing down allowances for company cars?
Writing down allowances spread tax relief over a number of years. Where a company car does not qualify for 100% first year allowances, relief is usually given through the main pool or special rate pool depending on the car's CO2 emissions.
Why are electric company cars tax efficient?
Electric company cars may combine low Benefit-in-Kind percentages with 100% first year allowances, which can reduce employee company car tax and accelerate corporation tax relief for the business.
Does employer National Insurance apply to company cars?
Employers normally pay Class 1A National Insurance on the taxable company car benefit. Lower Benefit-in-Kind values can therefore reduce both employee tax and employer National Insurance costs.
Can capital allowances reduce corporation tax?
Yes. Capital allowances reduce taxable profits. For companies, this can reduce corporation tax, although the timing and amount of relief depend on the vehicle, the business tax position and the capital allowance rules.
Do vans have the same capital allowance rules as cars?
No. Vans are generally treated differently from cars for capital allowance purposes. Vans may qualify for Annual Investment Allowance or other plant and machinery treatment, while cars are subject to specific car capital allowance rules.
Does DriveSmart recommend a company car?
No. DriveSmart provides factual vehicle, taxation and comparison data. It does not recommend a best or worst company car.
Related Company Car Tax Tools