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Pros and Cons of Buying a Car Through a Limited Company
Buying a car through a limited company can give you tax benefits and help with expenses. But you need to understand the rules, tax implications and the pros against buying personally. This guide will give you the key points to consider to help you make the best decision for your business.
Summary
- Buying a car through a limited company can give you big tax benefits, especially for business use vehicles, capital allowances and VAT reclaim.
- Personal use of a company car has extra tax implications, BIK tax, VAT reclaim and Class 1A National Insurance Contributions, so no emission vehicles are more tax efficient.
- Leasing or buying a car, it’s all about upfront costs, tax implications and the emissions, how it will affect your budget and your business finances.
Can I Buy a Car Through a Limited Company?
You can buy a car through your limited company, many do. As a result the car becomes an asset of the company. For tax purposes the use of the car must be mainly for business use i.e. client meetings and site visits. The primary purpose of the car must be to achieve business goals, not to be able to utilise tax benefits.
The process is more than just accounting for business mileage. The costs and tax implications can have a big impact on your company’s financials and any ensuing tax obligations of your limited company.
Directors can choose to buy or lease cars personally and claim mileage expenses or let their limited company own or lease the cars and benefit from certain tax advantages. So it’s important to weigh up what’s best for your business needs and financial situation before making a decision.
Buying a Car Through a Limited Company
Tax savings are a big incentive when buying a car through a limited company. By taking advantage of different types of tax relief, businesses can reduce their corporation tax bill. Capital allowances are one of the ways to get relief on the cost of the vehicle so companies can reduce their corporation tax spend. Reclaiming VAT adds another layer of savings for vehicles that are pool cars or used only for business.
Capital allowance deductions depends on the CO2 emissions of the vehicle and the age. Cars that emit less emissions or in some cases that are brand new get more generous allowances. Companies can also deduct expenses of running the car – including maintenance and insurance costs and running costs like fuel and road tax – from their taxable profits.
Claiming Capital Allowances
Companies can use capital allowances to deduct part of the car’s purchase price from their taxable income and get tax relief on capital allowance. The amount of relief depends on various factors such as CO2 emissions and if the vehicle is new or secondhand. Choosing vehicles with lower emissions not only gets higher allowance but also lower tax liability making it a more cost effective option.
When companies claim capital allowances they can reduce their overall tax bill – this is especially helpful for companies trying to reduce their corporation tax. This type of relief is from both the initial cost of the car and its emission profile so companies are nudged to choose eco-friendly cars when claiming capital allowances is considered.
VAT Reclaim
Companies that are VAT registered can get a huge benefit by reclaiming the VAT on car purchases when those vehicles are used only for business activities. This includes reclaiming the full VAT on the vehicle’s cost and all expenses associated with it. If a car is used for both business and personal purposes, the VAT reclaim could be fully blocked if the vehicle is purchased or 50% blocked if hired.
If a company pays for fuel, they can claim back the VAT on fuel used strictly for business tasks. But if they use fuel outside of work, they need to adjust their VAT return accordingly. By doing this, companies are complying with tax regulations while still getting tax savings on their business expenses.
Tax Implications for Personal Use of a Company Car
Using a company car for private mileage has tax implications including the Benefit in Kind (BIK) tax. This is calculated on the vehicle’s list price and CO2 emissions. Cars that emit less CO2 gets lower BIK tax so more tax efficient.
Employers must pay Class 1A National Insurance on the value of the BIK for personal use. Journeys to and from work fall under this category and is factored into an individual’s tax bill for using a company car for non-business activities.
Given these points, individuals must thoroughly consider all tax implications before using a company-provided car for personal journeys.
Benefit in Kind (BIK) Tax
Benefit in Kind (BIK) tax is the tax on the personal use of a company car, calculated using the vehicle’s list price and CO2 emissions. The taxable benefit is the list price multiplied by a percentage from the CO2 emissions. This percentage increases with higher emissions so eco-friendly cars are more tax efficient.
For example, if a company car has a list price of £30,000 and a CO2 emissions percentage of 20%, the taxable benefit would be £6,000. This is added to the employee’s taxable income and affects their personal tax bill.
Choosing low-emission vehicles gets lower BIK tax and overall tax savings.
Class 1A National Insurance Contributions
Employers must pay Class 1A National Insurance of 15% on the benefit in kind (BIK) they provide when giving a company car. This adds to the overall cost of providing a company car as an employment benefit.
Employees do not have to pay any National Insurance for receiving a company car from their employer.
Running Costs and Fuel Expenses
Company car expenses such as fuel, maintenance and insurance are allowed as an expense for tax purposes. These can be claimed by a limited company to reduce its corporation tax liability. Costs incurred in the servicing and maintenance of the vehicle which is necessary for its use fall into this category.
Insurance and road tax costs can also be deducted when calculating Corporation Tax. Electric vehicles often have lower running costs and may not incur congestion charges – a bonus for businesses located in urban areas.
Note that insuring company cars cost more than personal vehicles.
Fuel Scale Charge
Businesses that provide fuel for private use in company cars need to be aware of the fuel scale charge. This is calculated by taking into account the CO2 emissions of the vehicle and applying it to a fixed multiplier known as the fuel benefit charge multiplier, which is £27,800 for 2023/2024.
For example, a company car with 150g/km CO2 and a percentage rate of 30% would have a fuel benefit charge of £8,340. Businesses need to adjust their VAT returns to account for private use of this fuel. By doing so they can stay tax compliant and keep track of their fuel expenses.
Leasing vs Buying a Car Through Your Limited Company
Leasing or buying a car through a limited company has its pros and cons. Leasing means lower initial costs and fixed monthly payments which makes financial planning easier. Most of these lease payments are tax deductible but deductibility may be limited depending on the CO2 emissions of the vehicle.
Buying a car outright means it becomes an asset on the company balance sheet and you can use it unrestrictedly and claim capital allowances. Large upfront costs can drain cash reserves and depreciation will reduce future sale value.
Tax efficiency in leasing scenarios: Vehicles over 130g/km only allow 85% of lease costs to be deducted. Vehicles below this threshold can be fully expensed against tax. Whether to lease or buy depends on many factors including fiscal health of the entity, tax implications and vehicle usage over time.
Mileage Allowance for Personal Vehicles
Business owners who use their personal vehicle for business purposes can claim a mileage allowance. HMRC sanctioned rates for business travel are 45p per mile for the first 10,000 miles and 25p per mile thereafter. Claiming this reimbursement helps avoid Benefit in Kind taxes and covers vehicle usage costs on work journeys.
It’s essential to keep a precise record of all travel miles when claiming mileage because any payment above the sanctioned limits will attract tax and National Insurance contributions. This allows business owners to manage their travel expenses tax efficiently.
Electric and Low Emission Cars
Limited companies can benefit greatly from buying electric and low emission cars. For new electric cars with 0 CO2 emissions, businesses can claim full tax relief in the first year of purchase, a big opportunity for companies to reduce their tax burden.
Government incentives exist to reduce the purchase cost of eligible low emission vehicles. Financial help is available through the Workplace Charging Scheme to install charging points for electric vehicles at company premises.
With these incentives and reduced running costs, buying electric and low emission cars is a sensible decision for eco-friendly companies.
How to Buy a Car Through a Limited Company
Buying a car through a limited company requires several key steps. Start by assessing your transport needs, how often you’ll use the car and what model suits your needs. Set up a budget that includes costs for buying or leasing, insurance and maintenance. If you’re buying a car research different models within your budget and pay particular attention to the CO2 emissions.
Get quotes from different dealerships or lease providers to compare prices and terms. If buying on finance check the repayment terms are within your company’s means before signing any agreements.
When you buy make sure the car is registered in the name of your limited company, this will make tax documentation easier to handle. Keep records of all car expenses. This will simplify tax submissions and maximise deductions. When buying a car through a limited company setup inform HMRC as soon as possible to comply with the tax laws.
Professional Image and Practical Considerations
Having a company car can give your business a professional image, showing you’re trustworthy and committed to excellence. This will have a positive impact on clients and partners as it’s clear you care about your image.
Choosing eco friendly cars for your fleet shows your company is serious about sustainability, this will impress environmentally conscious customers and associates. While cost is important, these benefits are key when deciding to buy a car for business use.
Disposal of a Company Car
When selling a company car you need to be aware of the tax implications. Any profit from the sale is taxable and is called a chargeable gain. If the sale proceeds are more than all the capital allowances claimed for that vehicle the company may have a balancing charge.
If the company car is given away or transferred without an outright sale capital gains tax or corporation tax may still apply if there’s been a financial gain on the asset. Companies must declare any profits made from disposing of assets in their Company Tax Return submissions to HMRC. To manage these tax liabilities correctly keep accurate records and report them properly.
Summary
Buying a company car through a limited company can bring big benefits, tax reductions and a good corporate image. Business owners can make informed choices that match their financial aims and business needs by understanding the tax implications, running costs and comparing lease options to buying. Electric and low emission vehicles offer extra perks and savings.
Ultimately the decision to buy a car through your limited company requires you to consider your business needs and financial situation. Getting tax advice might be wise to handle the complexities and maximise the benefits. Done correctly having a company car can help drive your business forward.
FAQs
Can I buy a car through my limited company?
Yes you can buy a car through your limited company as a company asset but it must be used primarily for business use to optimise tax benefits.
What are the tax advantages of buying a car through a limited company?
Buying a vehicle through a limited company can give tax benefits including capital allowances that reduce taxable income and the ability to reclaim VAT as long as the car is used solely for business use.
These savings can be big for your business.
What is Benefit in Kind (BIK) tax?
BIK tax is the tax liability that arises from personal use of a company car and is calculated on the vehicle’s list price plus its CO2 emissions, higher emissions means higher BIK tax.
Should I lease or buy a car through my limited company?
Leasing a car through your limited company generally provides lower upfront costs and fixed monthly payments while buying gives you ownership and tax benefits.
Check your financial situation and long term needs to decide what’s best for you.
How are running costs and fuel expenses calculated for a company car?
Running costs and fuel expenses for a company car can be managed to reduce tax liability as these costs are tax deductible.
By having the company pay for these expenses businesses can reduce their overall financial burden.
