By Lynne Gowers on 17th August 2018

Company Car Benefits – should I buy a company car?

If you need a vehicle for your business, you can choose whether you purchase it through your limited company or buy it personally and claim fixed mileage costs.

Obviously there are different tax implications and reliefs depending on which you decide so we have created a short guide to help you explore the options and make an informed choice.

Option 1: Buying a car through your limited company

If you purchase a car through your limited company, the company can claim Capital Allowances to gain tax relief on the purchase price, which serves to reduce the company’s taxable profit.

The Capital Allowance for cars is dependent on the CO2 emission levels. For 2018-19 the annual allowances are as follows:

  • CO2 emissions of 110g/km or less = 18%
  • CO2 emissions over 110g/km = 8%
  • First year allowances for electric cars are 100% so long as CO2 emissions are below 50g/km.

The company will also get tax relief on the running costs of the car, such as vehicle tax and insurance. These are deductible expenses for Corporation Tax.

The company can’t normally reclaim the VAT on the cost of a new car, but the VAT on running costs is claimable.

Option 2: Leasing a car through a limited company

If your company leases a car instead of buying it, the lease payments can be claimed as a business expense. However, for cars with CO2 emissions of more than 110g/km, there is a flat rate disallowance of 15%. That means that 15% of the cost is not tax deductible.

If you lease a car you can usually claim 50% of the VAT where you are standard rate registered for VAT.

It should be noted, where the company enters into a hire purchase agreement, the legal owner of the asset at the end of this term is the company and therefore the capital allowances route as detailed in Option 1 is followed.

How are company car benefits taxed?

Whether the company buys or leases the vehicle, (or owns this at the end of the payment term), its use creates a taxable Benefit in Kind to you (or an any other company employee) as an individual, where the vehicle is available for personal use.

To calculate this charge, you need to multiply the list price of the car by a fixed rate percentage based on CO2 emissions.

There is an additional taxable Benefit in Kind if the company pays for fuel for private use.

Company car tax calculator

Handily, HMRC have done the complicated working out for you with their Company Car and Fuel Benefit Calculator.

It should also be noted hire cars, whilst an allowable business expense for Corporation Tax purposes they do have the same benefit in kind rules as above.

Other considerations for limited companies

  • The limited company will have to pay Employers Class 1A NICs on taxable Benefits in Kind (13.8% for 2018-19 and must also produce a P11D detailing the value of the benefit(s).
  • Taxable benefits (including use of a company car) are treated as income and are included in your total earnings for the tax year. So, if you are a higher rate taxpayer you will potentially pay 40% tax on benefits received.

Option 3: Buying a car personally to use for work

Comparatively, the tax rules around using your own car for work are somewhat simpler.

It is important to say that the initial outlay, or financing costs are not tax deductible when you buy a car yourself. Neither can you claim tax relief on the running costs, including tax, MOT, servicing and insurance.

Instead you can claim a tax-free allowance from your company for business mileage. This is a fixed rate allowance and includes all costs associated with using the vehicle, including the running costs.

For a car (or van), HMRC’s approved rate is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter. The limited company claims Corporation Tax relief on the amount it reimburses to you.

The company can also claim VAT on the fuel element of the mileage reimbursed, where you are registered for standard rate VAT and fuel receipts are collated to cover the amount claimed.

Option 4: Company car allowance

Your employer may provide you with a company car allowance, you use these funds as you wish to go toward any purchase or running costs for your own vehicle.

This is effectively additional cash and therefore tax and national insurance contributions would be deductible for yourself and the employer using the normal PAYE rules via the company payroll.

As you own the vehicle, you can also claim mileage from the company, as detailed in Option 3.

Please note, should your company not organise, pay for and effectively own the vehicle / lease, you will be taxed for any reimbursement in the same way as the company car allowance. If therefore the benefit rules are to apply, do ensure the correct ownership and payment methods are established when entering into such agreements.

This should however be carefully considered in line with the remuneration package you receive.

Company car or car allowance – at a glance

Ownership and payment methods for a vehicle should be established from the outset, as who owns the car triggers the tax treatment.

Company car

  • The company can claim Capital Allowances to gain tax relief on the purchase price
  • The company car is taxed on the employee as a benefit in kind. The company can either payroll this benefit or report this on the P11D and pay Class IA NIC on the benefit in kind
  • The annual Capital Allowance for cars is based on CO2 emissions
  • Running costs, including car tax and insurances, are deductible expenses for Corporation Tax
  • The company can reclaim the VAT on the running costs, but not on the cost of purchase.
  • The employee can claim mileage at the approved company car rate (currently 7p – 22p per mile dependent on fuel type and engine size)

Car Allowance

  • An allowance provided by the employer towards the purchase or running costs of a car
  • The car allowance is taxed as if it were salary on the employee. If this is your own company, paying a car allowance may not be tax efficient, dependent on your personal circumstances
  • The car allowance is taxed as if salary on the employee ie employees NIC is payable and the cost is allowable for corporation tax
  • As the owner of the vehicle, you can claim mileage from the company at the HMRC approved rate (45p for the first 10,000 miles and then 20p per mile)
  • The employee cannot claim any running costs for the car as these are covered in the mileage.

Company car mileage allowance

If you reimburse employees for business travel in their company cars, you use Advisory Fuel Rates (AFR).

The rates are calculated based on fuel prices and adjusted miles per gallon figures, so they vary according to fuel type and engine size.

The Advisory Fuel Rates from 1st June 2018 can be found here

These rates should also be used when the company requires an employee to repay the cost of fuel used for private mileage.

Personally owned car used on company business

These can be reimbursed at the approved mileage and fuel rates found here

Company cars for sole traders

If you are sole trader, there is no distinction between you and the business, so you cannot own a “company car” as such – you will always own the vehicle.

However you can still claim tax relief on your business travel. There are two methods of calculating how much you can claim:

Mileage method
Keep a log of your business mileage over the tax year then apply HMRC’s approved mileage rates to the total.
The total is entered into your sole trader accounts as a business expenses, so that it reduces your profit and therefore the amount you pay tax on when you do your self-assessment.

Proportion of actual costs
Using this method you start with your total mileage for the tax year, both business and private.
You then work out your business mileage as a proportion. So if a quarter of your business journeys are for business purposes, 25% is the business proportion of the car’s use.

You then apply this percentage to the actual costs of running the vehicle. This includes fuel, insurance, tax. MOT, servicing and repairs.
The figure you enter in your accounts is the proportion of total actual costs you have incurred in keeping that vehicle on the road.

Need some more information on business expenses?

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Lynne Gowers Written by Lynne Gowers

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