Buying a car through your limited company. Is it worth it?

Are you thinking about buying a car via your limited company?

Before you go ahead, consider the tax implications of using a company car vs. using your own car and claiming back mileage costs.

Buying a car through your company is an attractive proposition to many, especially given the wide range of purchase options available and special offers.

Electric cars are now a key consideration, as their Benefit in Kind rates remain significantly lower than petrol and diesel vehicles.

Company car costs can be offset against Corporation Tax

The company pays for fuel, servicing, and other costs, as well as the vehicle cost.

These costs can generally be offset against your company’s Corporation Tax bill, subject to the usual rules.

The company can claim capital allowances on the car’s purchase price

The company can also claim capital allowances on the car’s purchase price.

The level of relief depends on the type of vehicle.

New zero-emission cars qualify for 100% first-year allowances, meaning the full cost can be deducted from profits in the year of purchase, provided the qualifying conditions are met.

Other cars may qualify for writing down allowances at 14% or 6%, depending on their CO2 emissions.

Beware benefit in kind costs to both company and employee

However, what isn’t always obvious to many people is that providing a company car for private use can create tax costs for both the company and the employee.

The employee pays income tax on the Benefit in Kind (BiK), while the company generally pays Class 1A National Insurance on the taxable benefit.

The amount of tax you pay depends on various factors, including the car’s value, your earnings, and the type of fuel it uses.

For example, if you are a high earner and drive an expensive car that emits a lot of CO2, you will pay the most.

How to reduce your company car tax

When you choose the type of car you want to buy through your company, find out which factors affect the size of the BiK.

If the car is only available to you for part of the year, you make a qualifying contribution towards the cost of the car, or the car has low CO2 emissions, these factors can reduce the BiK charge.

Diesel cars that do not meet RDE2 standards can attract a 4% surcharge compared to petrol models, subject to the overall maximum BiK percentage.

Choosing an electric or plug-in hybrid car can significantly lower your BiK tax.

In the 2026/27 tax year, fully electric cars have a BiK rate of 4%, which is set to rise gradually in future years. Traditional petrol and diesel cars, depending on CO2 emissions, can reach rates of up to 37%.

Company car tax rates are updated yearly, so keep up with any changes.

How to calculate company car tax

If you’re unsure 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; factors include:

• Car list price (the manufacturer’s recommended retail price, including VAT)
• Cost of delivery
• CO2 emissions data (determines the BiK band)
• Fuel type (petrol, diesel, electric)
• Optional extras (excluding road tax or registration fees)
• If the taxpayer contributed to the capital cost of the car
• When the car was registered (before or after 6th April 2020)

To get the car benefit charge, multiply this figure by the appropriate percentage BiK band based on the car’s CO2 emissions and fuel type.

To calculate your additional income tax, multiply the car benefit charge by the income tax rate that applies to you.

You don’t pay employee National Insurance on the benefits you get in your job, and this includes your company car.

However, your company generally has to pay Class 1A National Insurance at 15% of the car benefit charge.

What if the company pays for fuel too?

If your company pays for fuel for private journeys, there can be an additional taxable fuel benefit.

This is based on a car fuel benefit multiplier that increases each year. For the 2026/27 tax year, the multiplier is £29,200.

The multiplier is multiplied by the same appropriate percentage used to calculate the company car benefit. The employee pays income tax on the resulting benefit, and once again, the company incurs a Class 1A National Insurance charge.

For many, company-paid private fuel is not cost-effective. The taxable benefit can outweigh the value of the fuel provided, making it cheaper to cover personal fuel costs instead.

Electricity provided by an employer to charge a fully electric company car does not give rise to the same separate fuel benefit charge.

Making changes – keep HMRC in the loop

Make sure your employer or accountant keeps HMRC up-to-date with any changes you make – for example if you change company car, or the company stops paying for fuel.

If the taxable value of your company car benefit changes, your tax position may also need to be updated so you’re paying the right amount of tax.

Company car vs. using your own car and claiming mileage

If you decide to use your own car for company business, you can claim a fixed mileage allowance instead.

HMRC increased the approved mileage rate for cars and vans from 6th April 2026.

Here are the current rates:

• 55p per mile for the first 10,000 business miles.
• 25p per mile after 10,000 business miles per year.
• 24p per mile for motorcycles.
• 20p per mile for bicycles.

These rates are intended to cover the running costs of your own vehicle, including repairs.

Any mileage costs are reimbursed to the employee. The company can offset the costs against its profits.

Final thoughts

As you can see, the way cars are taxed is complicated.

The decision to buy or hire a car through your company, vs claiming mileage, depends on many factors.

How many miles will you travel each year? Can your company get a good hire deal? Do you want to avoid paperwork?

In the end, it comes down to practicalities and how much tax you’ll pay.

We recommend you chat with your accountant before you make your decision.

Read more in our complete guide to limited company expenses.