Buying a company car means buying the car through your limited company rather than buying it personally
This guide covers everything you need to know about buying a car through your limited company, so, whether you’re considering making this purchase, or are wondering how to buy a car through your business, read on.
We have also included some examples of different purchasing situations, which will help provide you with a better idea of the tax write-off situation.
If you’re looking for personalised tax advice, please reach out to our friendly, family-run business.
Purchasing your vehicle personally
If you buy a vehicle personally you will not be able to claim the purchase of the vehicle (whether it’s leased or bought outright) through your business, and so you will not benefit from any related tax deductions.
However, employees who purchase their own vehicle may still claim mileage allowance through their company.
How does mileage allowance work?
Mileage allowance covers the distance you travel pursuant to your role, for instance travelling to business meetings or visiting work sites. It does not include your commuting time to and from work, unless you are operating from a temporary office.
If you drive a car, your company will give you 45p per mile of business travel up to the first 10,000 miles, and 25p per mile for any mileage above this. For motorcycles and bicycles, this figure is 24p and 20p, respectively, regardless of the number of miles travelled.
You must keep a spreadsheet, called a mileage report, which details how many business miles you completed in your car, in the tax year (April 6th to April 5th). You must record the date of travel, the reason for travel, where you travelled to, and the miles you completed.
You don’t pay any personal tax on the money the company gives you against your mileage, and the company gets to deduct this amount from its profits, therefore reducing the amount of corporation tax your company needs to pay.
To give you an example, let’s say you made trips totaling 9,000 business miles in the tax year. The company would pay you at a rate of 45p per mile, totalling £4,050. You don’t pay any tax on it personally, meaning this amount will be paid into your bank account with no strings attached. The £4,050 would then be deducted from your company’s profits in the tax year, saving your business £1,012.50 in tax (using the Corporation Tax rate of 25% in 2025).
If your company decides to pay employees above the HMRC mileage rate (for cars, 45p up to 10,000 miles and 25p thereafter), you will be charged tax and national insurance on the extra amount. The company will also pay Class 1A NI on the additional amount, and this information will need to be put onto a P11d form.
Benefits of buying a company car through a limited company
The main benefit of buying a company car (as opposed to buying the car personally), is the full purchase price of the car can be used to reduce your taxes.
If you buy a company car through your limited company you will be able to claim the full cost of the car through the business and so save tax on it.
If you purchase the car by using a loan or Hire Purchase, you still own the car (you’re just getting a loan out to buy it), so you can still claim the purchase price off your taxes, and you can also claim the interest off your taxes as well.
Leasing a car is slightly different because you technically don’t own the car, instead you are essentially renting it, so you can’t claim the full cost of purchase. However, you can claim the rental costs, which we’ll explain later in the article.
The negatives of buying a company car
Purchasing a car through your limited company has a clear negative… using the car personally.
Personal use means anything at all that is not to do with the business. Even if you use the car just once for a personal trip (which let’s face it, pretty much everyone will, and HMRC is really strict on this), then you immediately pay what is called a Car Benefit In Kind.
Car Benefit In Kind
A car Benefit In Kind is a fixed fee you need to pay for the year. It isn’t worked out on how much you use the car personally; so regardless of if you use the car personally 99% of the time or just 1% of the time, you will still pay the same car Benefit In Kind.
The way you work it out is by using the market list price of the car when new (not when you bought it) and the CO2 emissions. To work out the figure you need to pay, just use HMRC’s calculator.
Your car Benefit In Kind is essentially the benefit in pounds of you having that company car. Your limited company will pay 13.8% of this benefit in Employers Class 1A National Insurance (2021), and you would pay personal tax on the benefit at whatever tax band you’re in (lower rate taxpayer or higher rate taxpayer or beyond). That could mean that your company pays 13.8% (2021), and (if you’re a higher rate taxpayer) you pay 40% (2021) as well!
There’s a little bit of an admin burden for your payroll person or accountant, as the company would need to fill out a P11d form with this info (so your company can pay the employers national insurance), and your Benefit In Kind would need to go on either your payroll or your personal tax return (so you can pay the tax on it).
Fuel Benefit In Kind
There is also something called a Fuel Benefit In Kind, which is focused on the personal benefit you are getting by using the fuel of the car (because the company will be paying for all of the company car’s fuel).
To avoid this, you should create a mileage report, which separates your personal usage miles from the miles completed pursuant to your role. Using this report, you can pay for the fuel used for the personal miles yourself, while the company will pay for all business mileage.
How to buy a car through your business
If you have decided to buy a car through your limited company, you will claim the purchase of the car through your business’s “Capital Allowances”.
Essentially, this is the method used to claim tax back on any asset you buy. Company cars work in the same manner as other asset purchases for your business – if you recall, your assets are not shown on your profit and loss account, and therefore don’t reduce your net profit. So, to be able to reduce your tax a special method has to be used.
Cars are deducted from your taxes in the following way:
It’s all based on CO2 emissions. If your car has CO2 emissions of over 110g/km you can only claim 6% of the value of it every year off your taxes.
If the car’s emissions are 1-50g/km it’s 18% each year, and if the car is wholly electric (or 0g/km) then you can claim 100% of it off your taxes every year.
What this really means is, while in all situations you can claim the entire purchase price of the car against your taxes, the higher the CO2 emissions, the more years it takes to save the tax.
As an example, if your net profit is £50k for the year, and you buy an electric (0g/km emissions) company car for £30k, your taxable profit would become £20k, and you’d only pay corporation tax (25% in 2025) on £20k.
Leasing a car through your limited company
If you take out a car on lease through your limited company, you won’t be able to claim the full purchase price of the car (because you don’t actually own the car, you’re renting it).
However, you can claim the monthly lease payments through your limited company as a business expense, therefore saving tax on them.
It’s important to note that you still need to consider the emissions of your chosen car, as, if the car you buy is over 50g/km in CO2 emissions, then you can only claim 85% of these lease payments instead of all of them.
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The advantages of purchasing a van through your limited company
Purchasing a van through your limited company is treated in the same way as if you were buying plant and machinery. This means that you can claim the full value of the van through your company and save tax on that purchase in the same year of purchase (claim 100% of the cost of the van straight away). I.e. you’re getting 100% allowances under the annual investment regime. This is far better than cars where, unless you were buying an electric car or a car with CO2 emissions of 0g/Kg, you’d only be able to claim 18% each year of the price of the car for tax purposes, or even just 6% for cars with emissions over 110g/Kg!
Vans also have very low benefits in kind, at just £3,500 (2021).
Fixed fuel van benefit £669 (2021).
Zero emission Vans: you need to report the zero emission Van on the P11d at 0% of £3,500 (£0). This is a highly efficient tax saving tip.
Concluding Vans: If you use the Van for personal use regularly then you’d have the Benefit In Kind. So, if you use your vehicle only for some personal use then it could potentially be far better if you get a van instead of a car, you’d save a lot of tax.
Purchasing a motorcycle through your company
Purchasing a motorcycle through your limited company is the same as vans in that you can claim the entire cost of the motorcycle through the company in the year of purchase (100% annual investment allowance).
If you use the motorcycle for a significant amount of personal use, then there is an annual benefit of 20% of the purchase price (including VAT) paid by the limited company (see the negatives of putting a car through your limited company for how you’re taxed on this benefit). And then of course the company must pay class 1 A national insurance contributions.
Examples of purchasing car through limited company
We’ve come up with a pretty simple answer to a complicated problem: Only buy a car through a limited company if that car has low CO2 emissions!
Essentially, it all comes down to the Benefit In Kind figure.
To decide if it’s better to buy your car through your limited company or not: Work out the Benefit In Kind of the car using the HMRC calculator, and, if the Benefit In Kind it calculates is less than 12% of the purchase price, then it’s worth buying it through the limited company. Please note that this is if you’re a higher rate OR a lower rate taxpayer, as both work out about the same.
Example 1:
You buy the car outright or through Hire Purchase and you’re a higher rate taxpayer. The car is £20,000, has CO2 emissions of 130m/Kg, and a Benefit In Kind of £7,000 (use the calculator to work out the Benefit In Kind on a certain type of car).
If you wanted to buy it personally, you’d probably take out £20k from your limited company in dividends and you’d pay £6,500 tax on this – 2021.
If the limited company bought the car it would save 19% corporation tax on the purchase of the car (2021), so £3,800 saved. It would then give the car to you and the company would pay 13.8% Class 1a National Insurance (2021) on the Benefit In Kind, so 13.8% of £7,000 = £966 (note, this is tax deductible for corporation tax as well but we’ve not included this very small saving), plus you would pay 40% income tax on the Benefit In Kind as well, so £2,800.
So, by putting it through your company you’ve saved £3,800 in tax, but are paying £3,700 each year. Buying the car personally means you’d only pay £6,500 tax once.
Also, if you own the car personally you can claim the business miles of your personal car through the business. For example, if you drive 10,000 business miles each year and you are a higher rate taxpayer, you would save an extra £1,800 each year off your personal tax bill! You wouldn’t get this if the business owned the car.
Example 2:
You lease a hybrid car, and have lease payments of £333/month including the vat. The car has CO2 emissions of 30g/Kg, and the car has a Benefit In Kind for you of £1,500.
Having the lease agreement personally means you’d need to take out an extra £333/month (or £4,000/yr) in extra dividends so you can use that money to buy the car. So you pay £1,300 dividend tax on this as a higher rate taxpayer (32.5% in 2021).
Having the lease agreement through your limited company means you save £633 in corporation tax and £333 in VAT because you’re allowed half the VAT and you can put the car as an expense through your limited company and so save corporation tax. You would then pay 13.8% Class 1A national insurance and 40% income tax on the £1,500 Benefit In Kind = £807.
So, in total you’re saving £1,459 per year in tax by taking out the lease through the business instead of personally.
Summary
We’ve concluded that it’s best to put your car through a limited company if the car has low emissions.
Let’s say you fancied treating yourself and your family to a £70,000 Tesla. If the company bought it outright, your company would save £13.3k in corporation tax that year!
If you bought it through a lease, not only would you claim the lease payments, but you’d also claim half of the VAT.
Also, probably the best bit, effectively you’ve taken out £70k from your company tax free, because you won’t pay personal tax on having that car (2021), whereas if you’re a higher rate taxpayer you’d pay £22.7k to take £70k out of your business in extra dividends.
Something to think about is that as these incentives are applicable to low emission vehicles, it’s unlikely they will stick around forever, as more and more people make the transition to electric cars. Therefore, you may have to start paying some tax later, but we say, enjoy these savings while you can!
Deciding whether to buy a car through your limited company is just one of the ways you can save tax. You can also get in contact with our family-run company, and we can give you a Free Tax Review.
We will look at a range of tax areas (including cars), addressed to your specific situation, and identify any opportunities to save money that your company may be missing.
Are you interested in working with specialist accountants based in Nottingham with national clients? Contact us today for a free consultation!
