Tax experts are cautioning South Africans against assuming that company cars offer significant tax savings, warning that hidden costs and fringe benefit tax can make them more expensive than owning a personal vehicle.
The warning comes as the 2026 Budget introduces an increase in the general fuel levy, a move expected to push up the cost of operating company vehicles.
Employees whose employers provide a company car but do not pay for private fuel expenses are likely to face higher commuting costs. Even where employers cover fuel costs, businesses will still face increased operating expenses despite fringe benefit tax continuing to be calculated using the vehicle's standard value.
The South African Revenue Service (SARS) treats the private use of a company vehicle as a taxable fringe benefit. Each month, a taxable amount is added to an employee's income, increasing the amount of Pay-As-You-Earn (PAYE) tax deducted from their salary.
According to accounting and tax firm Nuvia Auditors, many employees overestimate the financial benefits of receiving a company vehicle.
"A company car is usually not worth it. The lack of VAT recovery and the monthly fringe benefit tax make it expensive," the firm said.
"You're better off buying the car yourself and, where applicable, using a modest travel allowance to cover business trips."
How fringe benefit tax is calculated
The monthly taxable value of a company vehicle is calculated as a percentage of the vehicle's determined value, which is based on its original purchase price, including VAT but excluding finance charges.
The applicable rates are:
- 3.25% per month for vehicles with a maintenance plan.
- 3.5% per month for vehicles without a maintenance plan.
Employers are required to deduct PAYE on the full fringe benefit each month, regardless of how much of the vehicle is used for business purposes.
Employees can only claim an adjustment after submitting their annual tax return and providing an accurate logbook detailing business travel.
Nuvia Auditors said this can create a cash flow disadvantage, as employees effectively pay higher tax throughout the year before any adjustment is made.
VAT offers little advantage
The firm also dismissed the common belief that purchasing a vehicle through a company offers a VAT benefit.
Under South African tax rules, businesses generally cannot claim input VAT on passenger vehicles unless they operate in limited industries, such as vehicle dealerships.
This means a company buying a vehicle for R500,000 would pay approximately R65,217 in VAT, which cannot be reclaimed from SARS and becomes part of the vehicle's overall cost.
According to the firm, individuals purchasing a vehicle privately are in the same position regarding VAT, meaning there is generally no tax advantage to buying a passenger vehicle through a company.
Depreciation comes with future tax implications
Businesses are allowed to claim wear-and-tear allowances on company vehicles, typically spreading the deduction over five years, reducing taxable income during that period.
However, tax experts warn that this benefit may be temporary.
If the vehicle is later sold for more than its tax-written-down value, the difference is treated as taxable income through a process known as a recoupment, allowing SARS to recover some of the tax benefit previously claimed.
Compare the options carefully
While company vehicles may still make financial sense for employees who travel extensively for business, tax specialists say each case should be assessed individually.
For many taxpayers, purchasing a personal vehicle and receiving a travel allowance for business use may provide comparable or even greater financial benefits while avoiding the administrative burden and ongoing tax implications associated with a company car.