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While company cars often come with tax implications, there are specific situations where the associated benefits may be exempt. There are circumstances where it can be possible to offer employees car benefits that are exempt from tax.
Exempt expenses and benefits include the following:
Proper documentation and compliance are required in order to maintain these exemptions.
The trivial benefits legislation provides a simple and practical tax exemption that allows employers to give small non-cash benefits to employees without triggering tax or National Insurance charges.
To qualify as a trivial benefit, the cost to the employer must not exceed £50 per item. The benefit must not be cash or a cash voucher and must not be provided as a reward for work or as part of the employee’s contractual entitlement. It must also not be provided in recognition of particular services performed. Typical examples include modest gifts such as flowers, a bottle of wine, a meal voucher or a small seasonal gift.
Where these conditions are met, the benefit is exempt from Income Tax, employer’s and employee’s National Insurance and does not need to be reported to HMRC.
For directors of close companies, an additional annual cap applies. Such individuals are limited to £300 of trivial benefits per tax year, calculated as an aggregate of qualifying items. This limit does not apply to ordinary employees.
The rules are designed to reduce administrative burdens and provide clarity, but care is needed. Regular provision of benefits, or benefits that appear linked to performance, can fall outside the exemption.
Used correctly, trivial benefits offer a straightforward way for businesses to reward staff in a tax-efficient and low-compliance manner.
There is a trivial benefit-in-kind (BiK) exemption that applies to small, non-cash gifts (such as a bottle of wine or a bouquet of flowers) that are occasionally given to employees.
This exemption enables employers to offer modest, tax-efficient rewards while simplifying the administration of BiKs. The BiK exemption allows businesses to recognise employees in a small way without creating additional reporting obligations or tax liabilities.
Trivial benefits are a simple and effective way to provide gestures of goodwill or recognition, as long as they are not given as a reward for work performed or duties carried out. Typical qualifying occasions include events such as a marriage, the birth of a child or other personal landmarks.
Employers also benefit since these trivial BiKs do not need to be included in PAYE settlement agreements or reported on P11D forms, and they are exempt from Class 1A National Insurance contributions.
The tax exemption applies to trivial BiKs where the benefit:
Trivial benefits provided through a salary sacrifice arrangement are not exempt from tax. In such cases, the employer must report them on form P11D, using the higher of the amount of salary the employee gave up, or the cost of the trivial benefit provided.
For directors or officeholders of close companies (and their families), there is an annual cap of £300 on trivial benefit gifts. The £50 limit still applies per gift but allows up to £300 of non-cash benefits per person each year. If any single gift exceeds £50, the full value becomes taxable.
The tax you pay on the use of a company car depends largely on its CO2 emissions, so choosing a lower emission or electric vehicle can make a significant difference to your overall tax cost.
The benefits in kind (BIK) tax on company cars can be quite significant, with taxable rates ranging from 3% to 37% of the car’s list price when new. The rate depends on various factors, primarily the car’s CO2 emissions and fuel type. For instance, a petrol fuelled car emitting 155 g/km of CO2 or more would be taxed at the highest rate of 37% of its original list price. In contrast, an electric car with a range of 130 miles or more could benefit from the lowest rate of just 3%, significantly reducing the taxable benefit.
This creates a strong incentive for those driving company cars to switch to electric vehicles, as they would experience a noticeable reduction in their tax liability. This shift not only benefits the employees but also employers, who will see a decrease in Class 1A National Insurance contributions. These contributions are based on the total value of benefits provided in a tax year, so switching to electric vehicles helps lower overall costs for the employer.
Diesel cars attract an additional 4% supplement if they do not meet the Real Driving Emissions 2 (RDE2) standard. However, the supplement is removed entirely for diesel vehicles that are RDE2 compliant. The maximum BIK rate, including any diesel supplement, remains capped at 37%.
The taxable benefit is typically calculated based on the car’s manufacturer’s list price, which includes VAT, delivery charges, and number plates. The price considered is the list price on the day before the car is first registered. Any additional accessories fitted to the car also increase the taxable value. There are some exceptions. Employees can also reduce the list price by up to £5,000 if they make a capital contribution towards the cost of the vehicle. Special rules apply to classic cars, which have their own method for calculating the list price.
Using your own car or bike for work travel? You may be able to claim tax relief for business mileage.
If you are employed and spend your own money on items needed for your job, you may be eligible to claim tax relief on those expenses. However, you can usually only claim tax relief on items that are exclusively used for work purposes.
For example, you might be able to claim tax relief when using your own vehicle, whether it is a car, van, motorcycle or bicycle, for work-related travel. Generally, travel between home and your regular place of work does not qualify. However, if you travel to a temporary workplace or incur business mileage, tax relief is typically allowed.
Employers often reimburse mileage using a set rate per mile depending on the type of vehicle. HMRC publishes approved mileage rates that apply when employees use their own vehicles for business journeys. If your employer uses these rates, the reimbursement is not treated as a taxable benefit.
If you are reimbursed at a rate below the HMRC approved amount, you can claim tax relief on the difference through Mileage Allowance Relief. For cars, the rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter. The rate is 20p per mile for bicycles and 24p per mile for motorcycles.
Additionally, there is a passenger payment of 5p per mile per colleague if you transport other employees during business journeys in a car or van.
Employees using company fuel for private journeys can sidestep a hefty benefit charge by repaying the full private fuel cost to their employer by 6 July 2025. Miss the deadline, and tax becomes unavoidable.
This repayment process is known as "making good," and requires the employee to repay the employer for private fuel no later than 6 July following the end of the tax year. For the 2024–25 tax year, the repayment must be completed by 6 July 2025.
If the repayment is not made by the deadline, the employee becomes liable for the car fuel benefit charge. This charge is calculated based on the vehicle’s CO2 emissions and the car fuel benefit multiplier. The charge applies regardless of the actual amount of private fuel used, making it potentially costly for employees who only use a small amount of fuel for private journeys, such as commuting.
To avoid the tax, the employee must fully repay the employer for all private fuel used during the year, including fuel used to travel to and from work. Accurate record-keeping is essential, as HMRC will only accept that no benefit has arisen if the full cost is repaid by the deadline. In many cases, repaying the private fuel cost can be more financially beneficial than paying the fuel benefit charge.
Use a company car for personal trips? Avoid a hefty tax charge by reimbursing your employer for private fuel by 6 July 2025. It’s called “making good” – and it could save you a chunk in tax if your private mileage is low.
To avoid the car fuel benefit charge, an employee must "make good" the cost of all fuel used for private journeys no later than 6 July following the end of the relevant tax year. This means that the employee needs to reimburse the employer for any private fuel used during the 2024-25 tax year by this deadline to prevent any tax liabilities related to the fuel benefit.
When an employee is provided with fuel for private use in a company car, the default rule is that the employee is required to pay the car fuel benefit charge. This charge is calculated based on the car's CO2 emissions rating and is applied to the car fuel benefit multiplier. This has just increased to £28,200 for 2025-26 (2024-25: £27,800).
However, the car fuel benefit charge can be avoided if the employee repays the employer for all private fuel, a process known as "making good." Private fuel use includes fuel used for commuting to and from work.
By making good, HMRC will accept that no car fuel benefit charge applies, allowing the employee to avoid the income tax charge on private car fuel. Typically, it is more beneficial for an employee to reimburse the employer for the private fuel rather than pay the Income Tax charge, especially if private mileage is low.
If the employee does not demonstrate that they have repaid all fuel costs associated with private journeys (including commuting), the car fuel benefit charge will still apply. Therefore, it is crucial for employees to maintain accurate records of private mileage and ensure that all fuel costs for private use are fully repaid by the deadline to avoid unnecessary tax charges.
Have you set up a suggestion scheme for ideas that could save or earn you money? Employee suggestion schemes can offer up to £5,000 tax-free for valuable input — and even £25 for smaller efforts. A win for innovation and your employee payslip!
An employee suggestion scheme can offer many advantages for businesses, not only in terms of the valuable insights and innovations employees contribute but also through the potential for significant tax-free rewards. These schemes can help businesses save money, drive new business, and foster a culture of continuous improvement, all the while offering employees incentives for their contributions.
HMRC outlines two types of awards that businesses can offer employees under such schemes:
In addition to these conditions, there are other reasonable criteria that must be met for the payments to be considered tax-free. These criteria are designed to ensure that the awards are made in a structured and transparent manner.
Beneficial loans, where employees benefit from cheap or interest-free loans from their employer, can trigger tax implications. However, certain exemptions, like loans under £10,000 or qualifying loans, eliminate the need for employers to report or pay tax on them.
An employee can receive a benefit when they are provided with a loan from their employer that is either cheap or interest-free. The benefit arises from the difference between the interest the employee pays, if any, and the market rate they would have to pay if they obtained a loan from another source. These types of loans are commonly referred to as beneficial loans.
However, there are several situations in which beneficial loans may be exempt, meaning employers don’t have to report anything to HMRC or pay tax and National Insurance. One of the most common exemptions applies to small loans where the total outstanding balance to the employee is less than £10,000 throughout the entire tax year.
Other exemptions include:
In these cases, no tax or reporting requirements would apply to the employer.
Employers can voluntarily register to report and account for tax on certain benefits and expenses via the RTI system before the start of the tax year. This process, known as payrolling, eliminates the need to submit P11D forms for the selected benefits at the end of the tax year.
The deadline for submitting P11D, P11D(b), and P9D forms for the 2024-25 tax year is 6 July 2025. These forms can be submitted via commercial software or HMRC’s PAYE online service, as HMRC no longer accepts paper submissions. Employees must also receive a copy of the information by the same date.
Employees must also be provided with a copy of the information relating to them on these forms by the same date. P11D forms are used to provide information to HMRC on all Benefits in Kind (BiKs), including those under the Optional Remuneration Arrangements (OpRAs) unless the employer has registered to payroll benefits.
A P11D(b) is still required for Class 1A National Insurance payments regardless of whether the benefits are being reported via P11D or payrolled. The deadline for paying Class 1A NICs is 22 July 2025 (or 19 July if paying by cheque).
If no benefits are provided during the tax year, employers can either submit a 'nil' return or notify HMRC that no return is required. Penalties apply for late submissions or payments, of £100 per 50 employees for each month a P11D(b) is late.
