If you need to travel regularly for business purposes, you may well be considering your options when it comes to the optimal method and whether using a vehicle is preferable to public transport.
This guide is designed to explain your options for using a vehicle for business purposes, the respective tax treatments and other implications of this.
The first consideration is whether to use an existing, personally owned vehicle for business trips or whether the company will provide a vehicle for use to you.
Mileage
If you use your own vehicle for qualifying business journeys*, you may claim mileage using HMRC’s approved mileage rates:
| Vehicle | First 10,000 Business Miles | Over 10,000 Business Miles |
| Cars and Vans | 55p per mile | 25p per mile (35p from April 2027) |
| Motorcycles | 24p per mile | 24p per mile |
| Bicycles | 20p per mile | 20p per mile |
Points to note:
- You can also claim an extra 5p per mile per passenger for additional employees who are also undertaking the same business journey.
- Mileage claims should be supported by a mileage log showing the date, destination, purpose of the journey and business miles travelled. Ordinary commuting journeys are not allowable.
- The mileage rate covers both the fuel element of business journeys and also the associated running costs of the vehicle (depreciation, insurance, repairs and maintenance.)
- If you are using the Standard Rate Scheme for VAT and hold copies of the relevant fuel receipts, then you can reclaim VAT on the proportion of the mileage rate that relates to fuel costs. HMRC publish advisory fuel rates on a quarterly basis, detailing the proportion of a mileage claim that relates to fuel based upon engine size and the type of fuel used. VAT can then be reclaimed as 1/6th proportion of this.
*Business journeys must be to (and from) a temporary location as determined by the 24-month rule. Please see the 24-month rule factsheet for further information.
Company Cars
A company can provide a car to use for business and, potentially, personal use however there are multiple considerations as the tax treatments can differ significantly dependent on whether the car is purchased on finance or outright or whether it is leased, the fuel type of the car, whether the car is available for personal use and, if so, whether fuel is provided for both business and personal use.
Purchase, hire purchase or lease
In the first instance, how a company car is reported in the company’s accounts, the consequent tax relief and the VAT treatment depend on whether the car is on an operating lease, a finance lease, or purchased outright:
Operating lease – This is a lease arrangement equivalent to renting the car, where there is never any intention that this will be purchased outright. For the majority of our clients, who will fall under the micro-entities’ regime, the lease payments will be treated as revenue expenses that are reported in the profit and loss account and will receive Corporation Tax relief in the accounting period in which they are incurred. For larger companies, the rules around the accounting treatment of operating leases have changed with effect from 1st January 2026.
If a car is obtained under an operating lease contract, then VAT is normally chargeable on the monthly cost. If you use the Flat Rate Scheme for VAT, then none of this can be reclaimed. If you use the Standard Rate Scheme for VAT then only 50% of the VAT can be claimed, reflecting a reduction for personal use of the car however if VAT is charged on any maintenance portion of the lease, then his can be reclaimed in full if clearly identifiable.
Finance lease – This is a lease where, commonly, there will be an initial deposit followed by regular monthly payments for the duration of the lease agreement and, finally, the option of a payment to take full ownership of the car.
The accounting treatment would depend on the nature of this final payment. Where the lease is a ‘personal contract purchase’ then the monthly repayments essentially cover the anticipated depreciation and there will be a final ‘balloon payment’ equivalent to the expected market value of the car at the end of the lease period to take ownership of the car. Alternatively, if you decide not to make the balloon payment, the car can be returned at the end of the lease period.
The accounting treatment would depend on the likelihood of the balloon payment being made.
If you are unlikely to make this payment, then the lease would be treated as an operating lease and, for the duration of the lease period, those rules would apply.
Where the balloon payment is likely to be made, or where the final payment to take ownership of the car is a nominal fee or below the expected market value then the lease would be considered a traditional hire purchase. In this situation, the car would be treated as an asset owned by the business, with a corresponding liability representing the future leasing payments. If the car is available for personal use, then the VAT on this cannot be reclaimed, however the car would receive capital allowances which give Corporation Tax relief. The percentage of capital allowances given depend largely upon the car’s CO2 emissions.
Purchased outright – The car would be recognised as an asset in the company accounts, VAT would not be reclaimable if there is availability for personal use, and Corporation Tax relief would be given via capital allowances. The car would then be depreciated year on year.
Capital Allowances – When a car is recognised as an asset in the company accounts then it is posted directly to the balance sheet rather than going through the profit and loss account, as is the case for most expenses. In order to receive Corporation Tax relief, an adjustment is made on the Corporation Tax return to apply capital allowances, which reduce the taxable profit and hence the amount of Corporation Tax payable.
The percentages of capital allowances given on a company car purchased after 2021 and before April 2027 are as follows:
| Description of car | What you can claim |
| New and unused, CO2 emissions are 0g/km (or car is electric) | 100% first-year allowances |
| Second hand electric car | 14% Main rate allowances* (18% before 1st April 2026) |
| New or second hand, CO2 emissions are 50g/km or less | 14% Main rate allowances* (18% before 1st April 2026) |
| New or second hand, CO2 emissions are over 50g/km | 6% Special rate allowances |
Until April 2027, a new EV charging point can be installed at your home, be treated as an asset of your company and receive 100% first year allowances provided that it is solely used for business purposes. If there is a mixture of business and personal use, the amount that can be claimed is reduced proportionally based on the respective levels of business and personal use.
*The main rate allowance will reduce to 12% from April 2027.
Personal Tax Implications
If a company car is available for personal use, then it will give rise to a benefit in kind (BIK,) regardless of whether it is actually used. For an owner managed company with no separate business premises then, even being parked outside your house means that the car is available for personal use and the benefit in kind would apply.
The value of the benefit is calculated using the following steps and this is then treated as though you had received additional salary to this value and taxed accordingly. Your company would also have to pay employers Class 1A National Insurance on the benefit value.
Step 1 – Find the list price of the car. The list price is the inclusive price published by the manufacturer, importer or distributor of the car if sold singly in a retail sale in the open market in the UK on the day before the date of the car’s first registration.
Step 2 – Add the value of any accessories. The value of any qualifying accessories are added to the list price to further arrive at the value of the car.
Step 3 – Deduct any capital contributions. The effect of Step 3 is to reduce the amount carried forward from Step 2 where the employee has contributed a capital sum, or capital sums, to expenditure on the provision of the car or any qualifying accessory.
Step 4 – Find the appropriate percentage. The approved CO2 emissions figure for car benefit purposes is what is used when calculating the benefit % to be applied to the list price of the car, plus accessories, less capital contributions.
Fully electric vehicles – As these have no CO2 emissions, there is a fixed percentage applied as follows:
- 2025/26 – 3%
- 2026/27 – 4%
- 2027/28 – 5%
Hybrid vehicles < 50g/km – If the hybrid car has a CO2 emissions figure between 1 and 50g/km, you will need the appropriate zero emission mileage figure. This is the maximum distance in miles that the hybrid car can be driven in electric mode without charging the battery and determines the appropriate percentage as follows:
| CO2 Emissions (grams per km) | Electric mileage range | Percentage | |
| 2025/26 | 2026/27 | ||
| 0 | – | 3 | 4 |
| 1 to 50 | 130 and above | 3 | 4 |
| 1 to 50 | 70 to 129 | 6 | 7 |
| 1 to 50 | 40 to 69 | 9 | 10 |
| 1 to 50 | 30 to 39 | 13 | 14 |
| 1 to 50 | less than 30 | 15 | 16 |
Hybrid Vehicles > 50g/km & Petrol Vehicles – The percentage increases to 17% for emissions of 51-54g/km and by 1% for every 5g/km increase in emissions above this up to a maximum of 37% for emissions of 155g/km and above.
Diesel Vehicles – There is an additional 4% added to the equivalent emissions percentage for petrol vehicles up to a maximum of 37% unless the vehicle meets the Real Driving Emissions Step 2 (RDE2) standard.
Step 5 – Calculate car benefit for full year. Simply multiply the car value calculated in steps 1-3 by the appropriate percentage calculated in step 4 to arrive at the benefit in kind value for the full tax year.
Step 6 – Calculate Fuel Benefit. If fuel is provided by the employer for personal use, then a Fuel Benefit Multiplier (set annually by HMRC) is multiplied by the appropriate percentage calculated in step 4 to arrive at the fuel benefit in kind value.
Fuel Benefit Multiplier:
- 2025/26 – £28,200
- 2026/27 – £29,200
Step 7 – Apply a reduction for periods of unavailability. If a vehicle is unavailable for any part of the year, the benefit values calculated in steps 5 and 6 are reduced in proportion to the number of days of unavailability during the tax year.
Step 8 – Apply a reduction for any payments towards private use Payments that an employee makes for the private use of the car are deducted from the overall benefit value and can reduce the benefit charge to nil.
Once the benefit in kind has been calculated, this information is submitted annually to HMRC via the form P11D. The company then has to pay Class 1A National Insurance at a rate of 15% and you as director/employee would report the benefit in kind on your self-assessment tax return and be subject to income tax at your marginal rate.
Please note however that from the start of the 2027/28 tax year, benefits in kind for company cars and fuel will be reported via payroll and any tax deducted from your salary from the company.
Company Car Mileage
As an alternative to claiming fuel costs for company cars (and the associated fuel benefit,) it is possible to claim business mileage and, provided that the claims do not exceed HMRC’s advisory fuel rates rather than the usual mileage rates, then there would be no benefit in kind for fuel.
This is also the case for electric vehicles, which have an advisory electric rate. From 1st March 2026 onwards you can claim 7p per mile if using a home charger and 15p per mile if using a public charger.
In conclusion
Historically, company cars have not been particularly tax efficient for owner managed companies, as both the company and the director/employee have been subject to additional taxes.
With the increasing prevalence of electric vehicles however, both the low benefit in kind percentage and the ability of the company to cover the costs of leasing/purchasing have made this a significantly more attractive option.
Should you be considering your options around whether to use your own vehicle for business, or whether to buy or lease a company car then get in touch and your dedicated accountant will be able to assist with any advice and calculations to help you make an informed decision.