What is a Company Car Scheme?

A company car scheme is when a company offer their employees the use of a vehicle for business and personal use.

Although we’ve seen a rise in car allowances and alternatives in recent years a company car is still one of the most popular benefits in the UK.

Some companies provide a company car scheme when it is necessary for their employees to travel for work, for example with travelling salesmen. Others offer them as an additional perk as part of an employee's benefits package.

What are the Advantages of a Company Car Scheme?

If carefully managed and planned a company car scheme can bring a whole host of benefits for your business and employees.

Some of the advantages include:

  • It could cut the employer’s national insurance contributions.
  • You could be able to claim capital allowances which reduce the business’ taxable profits.
  • A company car scheme is a controllable reward scheme that won’t increase the business' wage and pension bill.
  • Making use of cars with low CO2 emissions can lower the company’s overall carbon footprint.
  • There are no implications for your employees' National Insurance.
  • Offering a company car can boost morale with your current employees and help with recruitment of new staff.
  • If the car is managed through the company this can often be more convenient for employees if the company also handles servicing and maintenance.
  • Advertising and branding can be added to a company car to help promote your business.

What are the Disadvantages of a Company Car Scheme?

As well as a lot of advantages there are a number of other factors you will need to consider when deciding if your business should run a company car scheme.

These include:

  • The business will be responsible for the fleet. This will cost time and money to manage, whether you decide to do this in house or through a fleet management service.
  • If you decide to buy vehicles outright the business will be responsible for taxing them.
  • Whether you decide to lease or purchase your fleet vehicles it will be the business’ responsibility to insure them.
  • Your employees can walk away from the benefit with no penalty.
  • Your employees may need to pay company car tax and, depending on whether you include fuel as part of your scheme, on fuel as well.
  • All of the vehicles you offer employees must be fit for purpose and suitable for the job required. This may be especially difficult to manage if you have a number of departments that have different vehicle requirements.
  • Depending on the size of your business and who you decide is eligible for a company car the cost of buying and leasing a number of vehicles can add up.

How to Set Up a Company Car Scheme?

It can be very easy to set up a company car scheme and it brings a number of benefits for both the company and employees.

Before setting up the scheme there are a number of questions you should ask:

  • What kind of cars will you offer? You’ll need to consider the employee’s needs and the CO2 emissions of the vehicles as this will affect some of the applicable taxes. Take a look at the section below to see more details on this.  
  • How will you fund the scheme?
  • What kind of scheme will you choose? We’ve included a breakdown below of the options available for you.
  • How many employees will you offer the scheme to?
  • What annual mileage will you expect your employees to need?
  • Will you place any restrictions on the scheme? If so what will these be?
  • What are the tax implications for the company and for its employees?
  • How many cars will you need?

Different Types of Schemes:

At Xcite Car Leasing we can currently only offer you Contract Hire Agreements for your fleet, but you should consider all schemes before deciding which is right for your company.

Contract Hire:

Around 80% of UK businesses opt for contract hire agreements when setting up company car schemes, making it the most popular of the options.

A contract hire is a business lease that lets you choose a car, lease length and estimated mileage.  

As a business you could be able to claim back up to 100% of the VAT on a lease as well if the vehicle is only used for business purposes. If your employee also uses the vehicle for personal use then you could claim back 50% of the VAT.

Contract Purchase:

Similar to a contract hire agreement a contract purchase agreement lets you select a vehicle to lease for a set period of time with an agreed annual mileage.

The vehicle will appear on the business balance sheet so you can claim capital allowances, but the monthly payments will not be subject to VAT.

A contract purchase agreement differs to a contract hire agreement as it offers you the option of purchasing the car once the contract expires though a predetermined balloon payment. If you decide you would not like to purchase the vehicle then you will need to hand it back at the end of the contract.

Finance Lease:

A Finance Lease is a lease agreement that gives you the option to purchase the vehicle at the end of the set term.

Like other lease agreements, you will be able to choose the vehicle, the length of the lease and the annual mileage for the contract.

The full cost of the vehicle, including interest charges, may be spread over the duration of the contract or you can choose to have lower monthly payments and one substantial final payment.

With a finance lease the vehicle will show on your company’s balance sheet and the outstanding rentals will be represented as a liability. 

Salary Sacrifice:

With a salary sacrifice scheme the employee funds their vehicle through a reduction in their salary.

As the cost of the non-cash benefit is deducted from their gross salary before statutory deductions your employees may be able to save on their National Insurance contributions. They will still be required to pay income tax on either the value of the car or the amount of income sacrificed.

Please note that if you decide this is the right scheme for your company then your employees will also need to pay company car tax on the vehicle.

Outright Purchase:

If you decide to purchase the vehicles for your fleet, then they will be the property of the business and fixed assets on your balance sheet.

This means your company will have complete control over how the vehicle is used but will also be responsible for any servicing and maintenance required.

With outright purchase, there is a higher initial cost as well as regular draws on the company finances for any required maintenance work.

Tax Implications for the Employer: 

As the employer you will need to pay class 1A National Insurance contribution on the taxable value of the cars and any fuel if this is included in your company car scheme. At the minute this is charged at a rate of 13.8% for the tax year 2020 to 2021.

If the company car is used solely for business purposes then you could be eligible for capital allowances on it, which allows you to deduct some of the expenditure from pre-tax profit. The deductible amount will depend on the age of the car and the level of its emissions.

Some cars with low CO2 emissions are also eligible for enhanced capital allowances for the first year, and this can be up to 100% with fully electric models.

As a business, if you lease your vehicles you will be able to claim back up to 100% of the VAT back on your payments, depending on whether they are used for personal use.

Tax Implications for the Employee: 

If your employees use the vehicle for personal use, which included commuting to and from work, then they will need to pay company car tax. Company car tax is calculated using the CO2 emissions and P11D value for the vehicle as well as the driver's tax rate. You can see a full breakdown of how this is calculated and if you could be exempt here. 

If you decide to include fuel as part of your company car scheme, then they will also need to pay a tax on this which is called a company fuel tax.

Other Things to Consider:


You can add signage to a lease vehicle as long as it does not damage the vehicle and is removed at the end of the lease before you have the car collected.

Fleet Management:

Fleet management can save your business time and money, looking after your fleet to keep it safe and up to date for all your drivers.


If you decide to lease vehicles for your company car scheme then you might want to consider maintained leases. For more information on maintenance packages you can take a look at our Guide to a Maintained Car Lease. Or if you decide to lease through Car Lease Special Offers you can discuss maintenance packages with one of our Leasing Consultants when exploring your leasing options.

If you have any more questions about running a company car scheme just get in touch with us on 03302210000.

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