This is the second part of our two-part blog series where we discuss 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.
In this part we will go through a worked example and show you how you could drive a company car and save £15K in tax. However, to understand the tax savings, we do recommend you read our previous blog which sets the scene and gives you an overview of how company cars are taxed.
How much tax could I save by purchasing a company car?
In order to illustrate the personal and company tax implications of a company car, we have two worked examples below assuming both these vehicles were purchased (not leased) via a limited company.
We will use the following data from each vehicle for the purposes of this worked example:
Both the Tesla Model X and BMW M4 are top of the range, luxury cars however the tax impact between the two is significant. This is because the Tesla is an electric vehicle with 0 g/km of emissions, whereas the BMW is a powerful petrol engine, with high emissions, and consequently, taxed more heavily.
Based on the above date, we have calculated the benefit in kind and related cost for the company to be as follows depending on whether you are a basic rate taxpayer or a higher rate taxpayer:
Tax implications for a basic rate taxpayer
Tax implications for a higher rate taxpayer
Assuming that you are a basic rate taxpayer and pay tax at 20%, the combined tax effect that you and your company will pay will be £575 per year for the Tesla, and £9,863 for the BMW – a huge difference. If you are a higher or additional rate taxpayer, the difference is even more stark, with the Tesla being £903 and the BMW being £11,256.
Tax savings in the company
Assuming the two vehicles are purchased outright (including via a HP or PCP arrangement) and not leased, the company will be able to offset the cost of the vehicles against its profits. The corporation tax savings for each of the vehicles is as follows:
The tax relief on the Tesla is therefore received in full in the first year (being a zero-emission electric vehicle), however the BMW will only receive 6% tax relief in the first year, and 6% each year thereafter.
Overall Tax Savings
Owning a Tesla Model X through your company will save your company £15.5k in corporation tax and would only cost you and your company around £575 in national insurance and personal tax annually. The net overall tax saving in the first year is therefore £15k!
The BMW on the other hand will save your company £867 in corporation tax but would cost you around £9.8k in national insurance and income tax annually, giving you a total overall tax charge of a whopping £9k!
Leasing a car through a limited company
If a vehicle is leased by a limited company, the personal tax and employers national insurance impact is the same as per the example above.
For a basic rate taxpayer, the combined tax cost between the individual and the company is £575 for the Tesla and £9,863 for the BMW.
However, the company obtains tax relief in a different way. The lease costs are allowable as a business expense and can be claimed against business profits.
For vehicles with low emissions, such as the Tesla, 100% of the lease costs are allowable to be claimed against business profits. For vehicles with high emissions, such as the BMW, 85% of the lease costs are allowable to be claimed against business profits.
In addition to this, if the company is VAT registered, the company can reclaim 50% of the VAT on the lease payments.
In order to further explain the tax relief, please see the worked example below. The worked example works on the basis of £1000 + VAT lease costs for each vehicle per month.
When looking at it just from a corporation tax perspective, the tax savings for both vehicles are similar with only a marginal difference.
However, when you compare both the combined corporation tax costs as well as personal tax and employers NIC, then we have a slightly different picture as illustrated below:
Overall tax cost
By leasing a Tesla, you have an overall tax saving of £3,133 compared to a tax charge of £6,155 for the BMW.
If you fancy driving a new car, then owning an electric vehicle through your limited company will give you the maximum tax relief whilst also giving you the benefit of driving a brand-new car. As shown in the example above, these tax savings could amount to £15k!
If you didn’t want to own the car, you could consider leasing an electric car and still save at least £3k in tax per annum using the Tesla example above.
We would not recommend owning or leasing a high emission petrol or diesel vehicle through a limited company, as the overall tax cost will not make this option a suitable option for most business owners.
The examples we used above are at two opposite ends of the spectrum, so it may be that petrol and diesel vehicles with lower emissions may become viable from a tax perspective if owned or leased through a company, however this will depend on the type of vehicle and appropriate tax advice will need to be sought.
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.