The answer to this question depends upon different factors involving your financial situation and importantly whether the car is going to be used for private traveling as well. Every decision made by a limited company needs to consider the tax implications to adopt the most tax-efficient route.
Advantages of buying a car through your limited company
Let’s consider the advantages of buying a car through your limited company with regard to tax savings.
Claim corporation tax deductions
There are a lot of expenses involving a company car like the cost of the car, its maintenance, insurance, fuel and road tax etc. Claiming tax deductions on these expenses can help the limited company in saving corporation tax.
A company can claim a capital allowance for the cost of a car bought for business purposes. The rate of the capital allowances depends on the car’s type (new or used) and CO2 emissions. The company’s tax liability can be reduced through these capital allowances as they balance out the company’s profits. Following are the rates of capital allowances for cars bought from April 2021 as per HMRC;
|Description of car
|What you can claim
|New and unused, CO2 emissions are 0g/km (or the car is electric)
|100% first-year allowances
|Second hand electric car
|Main rate allowances 18%
|New or second hand, CO2 emissions are 50g/km or less
|Main rate allowances 18%
|New or second hand, CO2 emissions are over 50g/km
|Special rate allowances 6%
Value Added Tax (VAT)
In cases where the car is used for business only, you can reclaim all of the VAT paid on its purchase price. But if the car is used for both personal and business purposes then only 50% of the VAT can be claimed. VAT can be claimed in full for a car used as a taxi or used by a driving instructor.
Tax implications of using a business car for personal use
Certain other tax implications should be considered thoroughly before deciding to buy a car through your limited company particularly if the car is going to have some personal use as well. The main taxes that need to be considered in this regard are as under;
Benefits In Kind (BIK) Taxes
The BIK tax is applied to the personal use of the company car by employees including the director as an employee. The personal use of a car is a non-cash benefit for the employee and is subject to tax. The BIK tax for a company car is based on several factors, including the car’s list price, CO2 emissions, and personal tax rate. The calculation must consider the list price with all accessories, including those added before initial availability and those costing over £100 added later.
Let’s say you have a company car with the following details:
- List Price: £25,000
- CO2 Emissions: 120 g/km
- BIK Percentage (based on CO2 emissions): 30%
- Employee’s personal tax rate: 20%
The steps to calculate BIK tax are as under;
- Determine the List Price: £25,000
- Find the BIK Percentage: Since the CO2 emissions are 120 g/km, the BIK percentage for this car is 30%.
- Calculate Taxable Value of Car Benefit:
- Taxable Value = List Price × BIK Percentage
Taxable Value = £25,000 × 0.30 = £7,500
Apply Personal Tax Rate:
BIK Tax = Taxable Value × Personal Tax Rate
BIK Tax = £7,500 × 0.20 = £1,500
Find the applicable CO2 emission percentage here
If you want to know more about benefits in kind, please refer to our guide here.
Class 1A National Insurance Contributions
when a company provides BIK to its employees then it is liable to pay class 1A National Insurance Tax on the value of that BIK.
The tax charge for the fuel benefit
An additional tax charge is applied to the fuel benefit when the company provides you fuel with for the car. The charge depends on the CO2 emissions.
The calculation of the fuel benefit charge involves multiplying the car’s appropriate percentage, which is based on CO₂ emissions, by the fuel benefit charge multiplier.
The fuel benefit charge multiplier for 2023/2024 is £27,800.
You can use HMRC company car and car fuel benefit calculator by clicking here.
Fuel scale charges
If the car is going to have private use as well then you will need to make an adjustment to the company’s VAT return for the VAT on the private element of fuel. The company will claim the full VAT paid but pay a fuel scale charge to HMRC for private use. The fuel scale charge is determined with reference to CO2 emission of your car.
Find the applicable fuel scale charge here.
Corporation tax on disposal of the car
Companies do not pay capital gain tax. Instead, they pay corporation tax (CT) on the disposal of capital assets. The company will likely need to pay CT in case of disposal of the car.
Proper Documentation and Record
Business and private mileage need to be clearly distinguished as per HMRC’s requirements. The details of the benefits related to the car and its uses need to be reported on P11D forms for employees and employers they must be reported on P11D(b) forms to calculate the Class 1A national insurance contributions and tax liabilities.
As Government‘s incentive to use environmentally friendly cars, the tax rates and BIK on low-emission cars and electric cars are lower as explained above.
Leasing Vs Buying
Buying a car outright will enable you to enjoy more capital allowance benefits as compared to leasing a car. Business car finance or lease payments are deducted as a business expense but it does not allow you to claim capital allowance. However, if there is an option to purchase the car like in a hire purchase contract, then capital allowances can be claimed.
A company car reflects a favourable professional image and can prove to be very useful in visiting clients or commuting for meetings.
Approved mileage option
If the nature of your business will require you to travel frequently for business, then it may be worthwhile to consider the option of using HMRC approved mileage option. Under this option, you will be reimbursed by the company at HMRC approved rate of £0.45 per business mile for the first 10000 miles and £0.25 per mile in excess of 10000 miles. This payment is intended to account for both the fuel expenses related to your business mileage and the depreciation of your personal vehicle. However, maintaining precise mileage records that document your business-related travel throughout the year is essential.
Evaluating the benefits and drawbacks of acquiring a car via your company is not always a straightforward process. While deducting expenses and capital allowances can provide advantages, one must weigh them against potential disallowances and overall tax implications. Consulting a tax professional is crucial to make an informed decision tailored to your company’s specific financial circumstances.
Fusion Accountants offers specialized guidance on the tax implications of purchasing a car through a limited company in the UK. Our expertise helps you make informed decisions that optimize benefits and minimize risks for your business.