You may have considered purchasing a car via your own limited company. However, before you go ahead, you should consider the tax implications of using a company car for your own personal use, compared to the option of simply claiming back mileage costs of using your own car whilst on business.
Buying a car via your company may be an attractive proposition to many – especially given the wide range of purchase options available, and special offers. Fuel, servicing, and other costs are paid by the company, alongside the costs of owning the vehicle.
These costs will be offset against your company’s Corporation Tax bill, and you can also claim capital allowances on the purchase price of the car.
However, what isn’t so obvious to many people is that you will need to pay a tax on your company car if you or your family use it privately. This includes for commuting. It is known as a ‘Benefit in Kind’, or BiK.
This means you will pay extra personal tax on the value to you of the company car, which will have a variety of stipulations to decide what this amount is. This may include the cost of the car to buy, what your earnings are, and what type of fuel it uses. For example, if you earn a high wage and drive an expensive car that emits a lot of CO2, you will pay the most.
It may be possible to reduce this amount if you only have the car part time, if you are paying something towards the cost of it, or if it benefits from low CO2 emissions. If your fuel is paid for by your employer for personal journeys, you will also pay a separate tax on this. When choosing a company car, it is important to consider what tax you will be liable for.
If you make financial contributions towards your company car scheme, this can help to lower your BiK rate. It is important to note that the company car tax rates are updated every year, so you will need to stay in the loop about what you’re paying.
If you’re not sure how much tax you owe, you can estimate the figure using the HMRC company car and fuel benefit calculator. Your tax is calculated by working out what the car’s P11D value is; this is the sum of its list price, the cost of delivery, any VAT, plus any optional extras (excluding road tax or registration fees).
These figures are then multiplied by a percentage BiK band, which is determined by the car’s CO2 emissions. The amount you are required to pay is then this figure multiplied by whatever your income tax band is – either 20%, 40% or 45%.
Typically, a diesel car will have a BiK rate that is 3% higher than a petrol car. If you are a high-mileage driver, you may find you can recover the difference simply through the better fuel economy you’ll receive. However, if you only drive a short amount of distance in your company car, it may be more cost-effective to drive a petrol car. In the financial year of 2016-17, electric cars have begun to attract a 7% BiK rate, as do hydrogen fuel-cell cars. These used to be free of any company car tax, but are now not part of this.
Changes and exemptions
If your company car or fuel payment details change, you will need to keep HMRC updated in order to ensure you are still paying an accurate amount. This includes if your employer no longer pays for the fuel you use personally, or if you opt to give a company car back.
If there should be any change to the value of the car, HMRC will also update your tax code, so you can be assured you are paying the correct level of tax.
You are not required to pay employees National Insurance on the benefits you get in your job, and this includes your company car. However, this cost is borne by your limited company in the form of Employees’ NICs.
Company car vs. using your own car and claiming mileage
If you are a sole trader, it isn’t possible for a vehicle to be considered a ‘company car’, as there is no legal difference between you and your business. It will always be your business.
However, you can claim tax relief on the mileage you use and this can be put through your accounts as part of your running costs.
This reduces your profit, and, therefore, the amount you need to pay tax on. You can also put it through your VAT return to reclaim the cost of this tax.
If you run your own limited company, you need to decide whether to purchase a car via your company, or use your own car, and claim for mileage.
If you choose to own the car, you can put your mileage through the business.
HMRC’s mileage method works out at 45p per mile for the first 10,000 miles you travel for business purposes in a single tax year, and then 25p after this. These rates cover the costs of buying, running and repairing a car.
As we discussed earlier in the article, if it is the company that owns that car, it is the company that is responsible for the running costs of the car.
These costs would help to reduce the company’s corporation tax bill. It would also be possible to claim capital allowances on the cost of buying a car; however, when buying a car through the business, be warned that it may cost you more money in personal tax if you are using it for commuting, and this can outweigh the benefits of buying it through the business and reducing your corporation tax.
We’d recommend talking to your accountant to work out which is the most tax-efficient method, according to your own company finances.
Read more in our complete guide to limited company expenses.