The 1 percent rule is intended to simplify the taxation of company cars for private use – and is therefore of great importance for many employees. This is because anyone who also uses their company car for non-work-related trips must pay tax on the resulting non-cash benefit. The company car is not only seen as a status symbol, but is also a popular salary component. But what tax obligations are associated with private use? And which method of taxation is suitable for whom? In this article, you will find out how the 1 percent rule works, when it is used and what you need to bear in mind.
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Company car taxation: What does this mean for employees?
Meal allowance, company cell phone, vouchers: All benefits that employees receive from their employer in addition to their salary are referred to as non-cash benefits. According to §8 of the Income Tax Act the non-cash benefit is equivalent to income and must be taxed accordingly as soon as the limit of 44 EUR is exceeded.
In the case of company cars in the fleet, the non-cash benefit does not arise solely through the ownership of a vehicle. Only if the employer expressly permits the private use of the company car in the employment contract does a non-cash benefit arise for the employer. There are two options for company car taxation: Either a flat rate using the 1% method or by keeping a logbook.
If you have chosen one of the two methods for company car taxation, you must use it for the entire calendar year. It is not possible to switch between the two methods within the year.
Regardless of the method chosen, the use of a company car for private journeys always leads to an additional tax burden – because the non-cash benefit increases the taxable amount of income. It is irrelevant how often the company car is used outside of working hours: Even occasional private journeys count as added value that must be taken into account for tax purposes.
Both the 1 percent rule and the logbook model have an impact on income tax and VAT, particularly for the employer. The so-called first place of work of the employee is also decisive for the tax assessment, as journeys there are treated differently from completely private journeys for tax purposes.
If certain journeys are not clearly documented in the logbook or if private and business use are mixed, the tax office may reject the entire regulation. In such cases, no costs can be deducted and tax is paid at a flat rate – often to the detriment of the employee. This makes it all the more important to separate business and private journeys precisely, especially in the case of electrically powered vehicles, where additional special regulations apply.
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What is the 1 percent rule?
The permitted private use of a company car represents a non-cash benefit for the employee. According to Section 8 of the Income Tax Act, this non-cash benefit is income that the employee must pay tax on. The 1 percent rule is a tax regulation to meet this obligation.
With the 1 percent rule, the private use of the company car is thus compensated at a flat rate. This should significantly simplify the tax process for employees and companies.
The so-called usage value of the vehicle is not determined individually, but is set at a flat rate based on the gross list price. This makes the method particularly attractive for employers with a large number of company vehicles in their fleet.
As the non-cash benefit is considered income, it is subject to both income tax and VAT – the latter is particularly relevant for employers.
The regulation also primarily affects company cars that are regularly used for journeys between home and work, as these must be taken into account for tax purposes in addition to private use.
How is the 1 percent rule applied?
Company car taxation with the 1 percent method
If you also use your company car privately, you can apply the 1 percent rule for company car taxation. Under this rule, the non-cash benefit arising from the private use of the company car is taxed monthly at a flat rate. For this purpose, 1 percent of the domestic gross list price of the company car at the time of initial registration is applied.
The gross list price corresponds to the new vehicle price including VAT and all optional extras, regardless of the actual purchase value or age of the vehicle. This means that even with an older or used company car in the fleet , the original list price of the new car is taken as the basis.
Calculation example
- Taxable income (excluding company car): 3,000 euros
- Gross list price company car: 40,000 euros
Gross list price x 0.01 = 40,000 euros x 0.01 = 400 euros
As illustrated in the calculation example, the tax burden for the employee is increased by the non-cash benefit of the company car. In this case, the employee must now pay tax on 400 euros more as a non-cash benefit.
1 percent rule: Travel between home and work
If the company car is also used for the journey between home and work, this must be taxed at 0.03% of the gross list price in Germany each month.
Calculation example
- Taxable income (without company car): 3,000 euros
- Gross list price company car: 40,000 euros
- Commute: 20 kilometers (20 days a month)
40,000 euros x 0.01 = 400 euros and
40,000 euros x 0.0003 x 20 = 240 euros
Total monetary benefit: 400 euros + 240 euros = 640 euros
The additional use of the company car on the way to work then increases the employee’s taxable income in the calculation example by a further 240 euros. Together with the non-cash benefit from the 1% rule of 400 euros, his taxable income is increased by the company car accordingly to 3,640 euros.
Exceptional case: journeys between home and place of work on less than 15 days per month
For employees who drive to work in a company car less than 15 days a month, however, a different rule applies. They must pay additional monthly tax on the company car at 0.002 percent of the gross list price per kilometer and journey. This means that each journey is considered individually.
Calculation example
- Taxable income (excluding company car): 3,000 euros
- Gross list price company car: 40,000 euros
- Commute: 20 kilometers (10 days a month)
40,000 euros x 0.01 = 400 euros and
40,000 Euro x 0.00002 x 20 x 10 = 160 Euro
Total monetary benefit: 400 euros + 160 euros = 560 euros
According to the calculation example, the taxable income of an employee with a company car amounts to a total of EUR 3,560. The tax burden for an employee who only uses their company car to travel to work 10 days a month is therefore 80 euros lower.
Definition of list price
The list price is the manufacturer’s recommended retail price. It usually includes the basic equipment of the vehicle as well as VAT, but no optional extras such as special equipment, transfer costs or discounts granted by the dealer.
1 percent regulation for hybrid and electric vehicles
While employees who drive a company car with a conventional drive have to pay tax on it using the 1 percent rule, the situation is slightly different for electric vehicles . Instead of 1 percent, only 0.5 percent of the gross list price is taxable as a non-cash benefit.
Since the end of 2023, there has even been a further concession for all electric cars purchased or leased between January 1, 2024 and December 31, 2030: If the list price is less than 70,000 euros, you only have to pay tax at 0.25 %. And 0.03% of the quartered list price is also charged for journeys between home and work. There are currently even plans by the federal government to raise the value to 95,000 euros.
Calculation example
- Taxable income (without e-company car): 3,000 euros
- Gross list price e-company car: 40,000 euros
- Commute: 20 kilometers (20 days a month)
40,000 euros x 0.25 x 0.01 = 100 euros and
40,000 euros x 0.25 x 0.0003 x 20 = 60 euros
Total monetary benefit: 100 euros + 60 euros = 160 euros
The calculation example briefly shows that an employee with an electric company car has to pay tax on a significantly lower non-cash benefit than with a company car with a combustion engine for the same use . The taxable income with a company car is EUR 3,160 – that is EUR 480 less than for a company car with a combustion engine. This makes e-vehicles very attractive for use as a company car.
When does the 1 percent rule not apply?
The 1 percent rule may or may not always be applied. In certain cases, other rules apply or alternatives for taxation are possible. Some such cases are listed below:
- No private use: If the employee does not use the company car privately, but exclusively for professional purposes, there is no non-cash benefit and the employee does not have to pay tax on it according to the 1 percent rule.
- Use of the logbook method: Employees also have the option of documenting their private and business journeys in a logbook. In this case, the flat-rate 1 percent rule can be avoided.
- Short-term provision: If a company car is only provided to an employee for private use for a short period of time, such as a few days or weeks, the non-cash benefit can be calculated on a daily basis instead of the 1 percent rule.
Advantages and disadvantages of the 1 percent rule
The advantage of the 1 percent method is that the calculation is relatively simple and time-saving, as you do not have to record each journey individually. However, the disadvantage of this formula for company car taxation is that the calculation method is based on the list price of the company car.
This means thatthe more expensive the vehicle, the higher the taxable amount. However, a less expensive company car and a long commute can also be detrimental for tax purposes using the 1-percent method. The flat-rate company car tax is therefore particularly worthwhile for employees who frequently use the company car for private journeys.
Calculation example
- Gross monthly income: 3,200 EUR
- New price: 48.000 EUR
- Distance residence → workplace: 30 kilometers for 20 days a month
Calculation:
- 48,000 x 0.01 = 480 Euro
- 48,000 x 30 x 0.0003 = 432 EUR
- 480 EUR + 432 EUR = 912 EUR
This results in a monthly non-cash benefit of 912 EUR, which must be added to the salary as additional income for company car taxation in 2024. Instead of the 3,200 EUR, this results in a gross monthly taxable income of 4,112 EUR for the employee.
Further advantages
Simple handling: The calculation of the non-cash benefit means that it is no longer necessary to keep a time-consuming logbook. This reduces the administrative burden and saves time. The method is therefore particularly worthwhile for employees who frequently undertake private journeys.
Planning security: Thanks to the flat rate, employees and employers know exactly how high the taxable non-cash benefit is. This enables a clear calculation of the costs.
Disadvantages
Disproportionate burden: For employees who only rarely use their company car privately, the flat rate can lead to an excessive tax burden, as it does not reflect the actual use.
High costs for expensive vehicles: For very expensive vehicles, flat-rate taxation can lead to high monthly tax payments, even though the vehicle is used very little privately.
Taxation of company cars with a logbook
If you only make a few private journeys with your company car, it is worthwhile taxing your company car with a logbook. This documents all journeys, whether private or business. Care must be taken to ensure that all trips are recorded as completely as possible and that no additions are made later. The tax office can only determine the correct tax rate for the use of the company car if you keep a complete logbook.
Logbook details
While a mileage entry for private journey is sufficient, you must document the following details for business related journeys:
- Before and after each trip: date, time and mileage
- Destination and purpose of the trip and name/company of the business partners or customers visited
Advantages and disadvantages of the logbook
Company car taxation using a logbook is more complex than the 1 percent method, as every journey has to be recorded. However, this may turn out to be more tax-efficient in the long run. This is because instead of a flat-rate taxation as with the 1 percent rule, the private use of the company car is recorded more precisely with the help of a driver’s logbook.
Using an electronic logbook for the taxation of company cars
An electronic driver’s logbook is particularly useful if you make many trips with your company car and complete documentation is not always possible. As with manual driver’s logbooks, electronic driver’s logbooks may not be subsequently adjusted and thus manipulated. For large fleets, electronic logbooks also make sense in terms of owner liability and driver’s license checks.
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Which method for company car taxation is worthwhile?
A company car not only offers employees a great deal of flexibility and mobility, it also means financial savings as there is no need to purchase a private vehicle. Whether a driver’s logbook or the 1 percent method makes sense for company car taxation depends on the individual case.
The more private journeys you make with the company car, the more advantages the 1 percent method offers for company car taxation. If you only use the company car rarely or for short private journeys, you can save more money with the logbook. Accuracy, both in keeping the logbook and in applying the 1 percent rule, pays off at the latest when you file your annual tax return.
FAQ - Company car taxation
If the private use of a company car is permitted, the employee receives a non-cash benefit. This is regarded as additional income for the employee and must be taxed accordingly.
There are basically two methods available for company car taxation: the 1-percent rule and the logbook. With the 1% rule, 1% of the gross list price of the vehicle is taxed monthly as a non-cash benefit. With a logbook, drivers must document all journeys made with the company car.
The company car taxation of electric cars is similar to the taxation of conventional vehicles. However, electric company car drivers benefit from tax advantages. Under the 1% rule, the non-cash benefit is calculated at only 0.25% or 0.5% of the gross list price, depending on the vehicle type and date of purchase.
When it comes to company car taxation, it often happens that employees do not keep the logbook correctly or incompletely. If details such as mileage, destinations or the purpose of the journey are not sufficiently documented, the tax office can declare the logbook invalid. It also happens that employees do not carefully check the requirements for electric vehicles for reduced company car taxation and lose out on tax benefits as a result.
Conclusion on the 1 percent rule
- The method for taxing the private use of company vehicles is relatively simple and straightforward to apply.
- Company car drivers with e-vehicles also benefit from a lower non-cash benefit that they have to pay tax on.
- The 1 percent rule can lead to a disproportionate burden if employees do not often use the company car privately. In this case, a logbook may be more favorable.
