Buying a company car means buying the car through your limited company rather than buying it personally
If you’re buying a vehicle, whether it’s a car, van or even motorcycle, and thinking about whether to buy it through your limited company or not, read on. We will give you all our knowledge on this topic, as well as look at different scenarios. You could potentially save a lot of tax!
In this article we’ll first go through all the information, so just follow the headings to find what is relevant to you. Then towards the end of the article we discuss what this actually all means for you, and though [disclosure] you cannot rely on any of this information to make any financial/tax saving decision, we do discuss the recommendations we give to clients based on different scenarios.
So, if you don’t care about the detailed information but only the conclusion just go straight there (also see the heading called “our best example”).
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 off your taxes.
The only thing you will be able to claim through your company is mileage allowance. You will have heard of mileage allowance before, it’s what employees get from the companies they work for. If you have a friend that has to go on a lot of business trips for their employer they will get something like 45p per mile for those trips. This 45p is essentially paying for their fuel and any wear and tear of the car. Because your limited company is a separate entity, claiming mileage through the company means you’re being treated like this employee, getting 45p per mile of business travel whilst using your own personal car.
The details of how mileage allowance works for a car or van are:
You get 45p per mile of business travel up to the first 10,000 miles, then you get 25p per mile after that. These are HMRC’s rates (2021). You’d do a mileage report each year to record how many business miles you did with your car (essentially just a spreadsheet giving rough details of the trips you covered during the year). The mileage record has to show the following information: date you travelled, the reason for the travel, where you went. You don’t pay any personal tax on this money the company gives you. And the company gets to deduct this money it gives you from its profits, meaning of course, you save tax on this money.
To give you an example, let’s say you made trips totalling 9,000 business miles in the year. The company would pay you 45p per mile, so £4,050, which you wouldn’t pay any tax on personally, it would just go into your bank account no strings attached, then the £4,050 would come off the company’s profits in the year and so would save corporation tax (19% in 2021), so save £769.50 in tax.
To work out how many miles you’ve done (to see whether you’ve gone over the 10,000 miles limit, and so have to start getting 25p instead of 45p per mile) you use the tax year (April to April) rather than your company’s year end.
Motorcycles have a mileage rate of 24p per mile for all business miles.
If for some reason you want to pay more than the HMRC mileage rates (45p and 25p), then you’ll be charged tax and national insurance on the extra, and have to put this information on a P11d form.
If for some reason the company pays more than the HMRC mileage rates (45p and 25p – 2021), then the employee would be charged income tax on the difference and the company pay Class 1 A NI on the extra, and have to put this information on a P11d form.
Benefits of Buying a Company Car (why you’d buy through your 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 technically own the car (you’re just getting a loan out to buy it), so you still can 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 however because you technically don’t own the car, it’s actually like you’re renting it, so you can’t claim the full cost of purchase, but you can claim the rental costs, we’ll get into that a bit further down.
How you claim the purchase price of a car off your taxes:
You claim the purchase of a car through your limited company through what is called “Capital Allowances”. Actually this the method used to claim tax back on any asset you buy (if you think about it your assets are not shown on your profit and loss account, and so don’t reduce your net profit, and 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 it’s 1-50g/km it’s 18% each year, and if it’s electric (or 0g/km) then you can claim 100% of it off your taxes every year.
What this really means is, in all situations you can claim all the purchase price of the car against your taxes, but the higher the CO2 emissions, the more years it takes to save the tax.
As an example if your net profit was £50k in the year, and you bought a company car for £30k, and the car was electric with 0g/km emissions, your taxable profit would become £20k, and you’d only pay corporation tax (19% in 2021) 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 leasing it), but you can claim the monthly lease payments through your limited company as a business expense, therefore saving tax on them. However, if the car you buy is over 50g/km in CO2 emissions then only can only claim 85% of these lease payments instead of all of them.
The negatives of Buying a Company Car
Putting a car through your limited company (whether leasing or purchasing) has a severe negative… using the car personally. Personally means anything at all that is not to do with the business! 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.
A car benefit in kind is a fixed fee you need to pay for the year, i.e. it isn’t worked out on how much you use the car personally, even if you use the car personally 99% of the time or 1% of the time, you’d 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’d 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 the 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).
There is also something called a Fuel Benefit In Kind, which is essentially the same sort of thing as the Car Benefit In Kind but on the benefit you are getting personally by using the fuel of the car (because the company is actually paying for all the car’s fuel). But, if you can create a mileage report, and so separate the personal miles from the company miles, meaning that you pay for the personal miles personally and the company pays for the business miles only, then there’s no Fuel Benefit In Kind, and so you don’t need to do this.
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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.
Analysis
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!
We’ve looked at scenarios until our eyes have popped out. But essentially, it all comes down to the Benefit In Kind figure.
How to quickly decide whether it’s better to buy a car through your limited company or not: Work out the Benefit In Kind of the car using this HMRC calculator and if the benefit in kind it calculates for you is less than 12% of the price you are buying the car, then it’s probably worth buying it through the limited company (this is if you’re a higher rate OR lower rate taxpayer, both work out about the same).
Examples of purchasing car through limited company
Example 1:
You buy the car outright or through Hire Purchase and you’re a higher rate taxpayer. The car is £20k, has CO2 emissions of 130m/Kg, and a Benefit In Kind of £7k (use the calculator to work out the Benefit In Kind on a certain type of car), this maybe for example a nice VW Golf.
If you wanted to buy it personally, you’d probably take out £20k from your limited company in dividends you’d pay £6.5k 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 £3.8k 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 £7k = £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 £2.8k.
So, putting it through your company you’ve saved £3.8k in tax but are paying £3.7k each year! Buying the car personally means you’d only pay £6.5k tax once.
Also, if you use the car personally you can claim the business miles of your personal car through the business. If you for example 10k business miles each year and you are a higher rate taxpayer, you would save an extra £1.8k 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 (let’s say an Audi A6 50 Avant quattro 2.0Te sport), and the car has a Benefit In Kind for you of £1.5k (use the calculator to work out what your benefit in kind would be).
Having the lease agreement personally means you’d need to take out an extra £333/month (or £4k/yr) in extra dividends so you can use that money to buy the car. So you pay £1.3k 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 (see relevant sections above for more information). You would then pay 13.8% class 1a national insurance and 40% income tax on the £1.5k 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
For the best conclusion possible on whether you should be buying a company car (i.e. buy the car through your limited company rather than personally), see our example 2 above.
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 £70k Tesla, if the company bought it outright (similar thing for lease), your company would save £13.3k in corporation tax that year!!
If you bought it through lease, not only would you claim the lease payments, but you’d also claim half of the VAT (yes cars have 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 your business in extra dividends.
Now there are a lot of things to consider however, e.g. the company owns the car and so that corporation tax benefit we mentioned above (£13.3k) would be affected if you sold this car, but realistically, wouldn’t you just buy another one if you sold this one? If so you’d get another huge tax reduction again! Another thing to think about is these incentives are only available now on low emission fuels so you may have to start paying some tax later, but we say, enjoy them while you can!
The thing is though, you don’t want to start buying cars that are too expensive (although the amount you save could allow you to buy a MUCH better car!), and a car you don’t want, just so you can save tax. And this is where it gets a lot more complicated, deciding over a few different cars you really want and deciding how much tax you’ve save (or lose) by putting them through your limited company could be a very complicated decision. But in the article above we have literally taken you through all the information you could want to know (including examples) to make that decision on your own.
Having said all this, deciding whether to buy a car through your limited company is just one of the ways you can save tax. OR if you prefer, we can give you a Free Tax Review, where for 15-30mins we will review your tax situation for free.
We will look at a range of tax areas (including cars), addressed to your specific situation.
Are you interested in working with specialist accountants based in Nottingham with national clients? Contact us today for a free consultation!
