In this two-part blog series we will be discussing the ‘ins’ and ‘outs’ of company cars, how they are taxed and whether it could be beneficial for you to own your car through your limited company. This blog is the first in the series. You will find the link to the second part of this blog towards the end of this blog.
There is a common thought that purchasing a car through your limited company is a great way to minimise tax and own a brand-new car. Is this true? Well – it depends!
Generally, for petrol and diesel vehicles – there are significant tax charges both on the individual and also on the company which means that for small business owners, owning this type of vehicle through a company may not the best choice.
However, in order to incentivise electric car ownership, there are favourable tax breaks and reduced tax for electric vehicles and hybrid vehicles which could make owning this type of vehicle through your company very favourable indeed.
Purchasing a car through your limited company is a big decision and it requires careful planning to ensure it is done correctly and in the most appropriate way for your needs. Although this blog outlines general principals, there are many other factors to consider so you should always seek advice before committing to a purchase.
The basics around company cars
When you purchase a car personally by yourself, you pay the purchase cost (or lease payments if leased) and all the related expenses (insurance, repairs, etc) out of your post-tax income. As the car is owned in your personal name, you can’t claim the cost of owning and running the car through your company, but you can claim mileage expenses and claim 45 pence per mile on all business journeys you undertake up to 10,000 miles per annum. If your business mileage exceeds 10,000, then you can claim 25 pence per mile on any mileage over 10,000 miles. The company receives tax relief at 19% on all mileage expense claims whilst you get to recoup some of your running costs. Whilst this is helpful to some extent, it’s not a significant tax saving.
The alternative is for the car can be owned by the company and made available for you to use both for business and private use. The car is therefore paid for out of the company funds (meaning you have more “free” cash available personally to spend as you like) and tax relief is obtained by the company. As a director, for you personally, the cost of the vehicle is paid for by the company, therefore all the costs are covered out of pre-tax income. The company then owns the car and is responsible for all the expenses of the vehicle (insurance, repairs, etc). The company can also pay for fuel for the vehicle (more on this later) – on which the company will also receive tax relief.
Owning a car through the company therefore seems like a no-brainer, right? Not quite… as the company is providing an asset to you for personal use, HMRC treat this as a benefit in kind and therefore will levy additional tax on you. A benefit in kind is treated as additional income for personal tax purposes, so the individual receiving the benefit has to pay tax on this at their marginal rate of tax (20%, 40%, 45%) depending on their other income. The company also has to pay Class 1A Employers National Insurance on this at 15.05% too.
How is the benefit in kind on the individual assessed?
The amount assessed as a benefit in kind is a sum calculated using criteria determined by HMRC. This is based on the list price of the vehicle when bought new and the CO2 emission ratings of the vehicle.
The list price of the vehicle is multiplied by a relevant percentage set by HMRC depending on the CO2 emissions of the vehicle. The percentage can range from 2% for electric vehicles, up to 37% for high-emission petrol/diesel vehicles.
This gives a total ‘taxable benefit’, of which the director or employee receiving the benefit has to pay income tax at either 20%, 40% or 45% depending on their tax band, The company also has to pay employers National Insurance on at 15.05%.
How does the company obtain tax relief on the car?
The company will receive tax relief on the cost of providing the vehicle and the tax treatment is dependent on whether the vehicle is owned or leased.
Vehicle is owned by the company
If the company owns the vehicle (whether purchased for cash or financed via a hire purchase or PCP arrangement), then the company will receive capital allowances on the purchase price. This allows a percentage of the total purchase price to be claimed as an expense against the company’s taxable profits, thereby reducing the company’s corporation tax liability. Depending on the emissions of the vehicle, the company may claim full tax-relief against the total purchase cost in year one, or the tax relief may be spread over several years as summarised below:
As is illustrated above, the lower the emissions of the vehicle, the greater the tax relief. An all-electric vehicle with 0g emissions gets maximum tax relief in full in the year of purchase, reducing your corporation tax significantly!. In some cases, the company may even get a tax rebate against tax paid in previous years from HMRC!
Unfortunately, VAT cannot be reclaimed on a company owned car where the director also has private use of the vehicle.
Vehicle is leased by the company
Where the company leases a vehicle, the leasing costs are treated as an allowable expense and 100% of the lease costs can be offset against the company profits if the emissions of the vehicle are less than 50 g/km.
Where the emissions of a leased vehicle are greater than 50 g/km, then 15% of the lease costs do get restricted, meaning you can only claim up to 85% of the leasing costs.
With leased vehicles however, you are entitled to recover 50% of the VAT which is an additional tax saving.
As mentioned earlier, all the expenses related to the car are allowable in full for both methods of ownership. These are claimed as an expense against business profits. Fuel can also be claimed as an expense, but if private fuel is paid for by the company, there is an additional benefit in kind charge on the individual.
Purchasing an electric car via a company is a great way to reduce your corporation tax liability whilst having the benefit of driving a brand-new car and is something all business owners should consider, particularly if you have a profitable business.
As with all things tax, nothing is ever straight forward so if you are thinking of purchasing a company car, do get in touch with us and we can review your individual circumstances and advise on the best way to structure the purchase and the tax implications of doing so.
In the second part of this blog series, we run through a worked example and show you how you can drive a brand-new car whilst saving £15,000 in tax!
Click the button below, for the next blog.
If you are considering a new car and would like to explore purchasing this through your limited company, please get in touch with us and we will be able to advise on the tax consequences and advise you on the best way of structuring the deal to maximise your potential tax savings.