Purchasing a company car can be a great asset for your business, but if not planned correctly, it can also be a significant tax burden. Whether you are a business owner, a company director, or a sole trader, understanding the tax implications and benefits is crucial to making a tax-efficient decision. Here’s what you need to know.
If you are unsure on how best to make your car tax efficient, get in touch with King and Taylor today.
1. Company Car vs. Personal Car: What’s More Tax-Efficient?
Before purchasing a company car, consider whether it is better to own the vehicle personally or through your company.
- Company-owned car: The business pays for the car, and you may be subject to Benefit-in-Kind (BIK) tax.
- Personally-owned car: You claim mileage allowances but bear the cost of the car yourself.
The right choice depends on factors like mileage, the type of car, and business use. Check on the Government website for more info on Tax on Company cars here.
2. Understanding Benefit-in-Kind (BIK) Tax
If a company car is available for personal use, you will likely pay Benefit-in-Kind (BIK) tax. BIK tax is calculated based on:
- The car’s list price (P11D value)
- The CO2 emissions
- Your income tax rate
Electric and low-emission vehicles attract much lower BIK rates, making them a more tax-efficient choice.
3. Choosing a Tax-Efficient Car
Some vehicles are more tax-efficient than others. Here’s how to reduce your tax liability:
- Electric Vehicles (EVs): Lower BIK tax rates (currently 2% for 2024/25).
- Hybrid Vehicles: If CO2 emissions are below 50g/km, BIK rates are significantly lower.
- Low-Emission Diesel and Petrol Cars: Still subject to tax but better than high-emission alternatives.
There is lots of info online about the most tax efficient company car, it depends on a number of factors. Fleet Alliance has a great article on this, read more here.
4. VAT Implications: Can You Reclaim VAT on a Company Car?
VAT can be reclaimed on a company car only if it is used exclusively for business purposes. If there is any private use, VAT cannot be reclaimed. However, you can reclaim VAT on leasing payments if the car is used for both personal and business purposes (50% of the VAT on lease payments can usually be reclaimed).
Buying a car as a self employed person
s a self-employed person in the UK, you have several options for having a company car, but the tax treatment will depend on how you structure it. Here’s a breakdown of your options:
1. Buying a Car Through Your Business
If you operate as a sole trader or in a partnership, you can buy a car through your business, but you can only claim expenses related to business use.
Tax Considerations:
- Capital Allowances: You can claim capital allowances on the cost of the car to reduce your taxable profit. The amount depends on the car’s CO₂ emissions:
- 0g/km (Electric cars) – 100% First Year Allowance (FYA) (claim full cost in year 1).
- 1-50g/km – 18% Writing Down Allowance (WDA).
- 51g/km+ – 6% WDA.
- Running Costs: You can claim fuel, maintenance, and insurance costs based on business usage percentage.
- Simplified Expenses: If you don’t want to track every expense, you can use HMRC’s mileage rates (£0.45 per mile for the first 10,000 miles, £0.25 after that).
🚨 Important: If you use the car for personal trips, you must adjust claims accordingly.
2. Leasing a Car Through Your Business
If you lease a car through your business, you can deduct lease payments as an expense, but the deductible amount depends on emissions:
- <50g/km CO₂ – 100% deductible.
- >50g/km CO₂ – 85% deductible (15% disallowed).
- VAT-registered businesses can reclaim 50% of VAT if the car is used for personal and business use, or 100% if it’s only for business use.
🚨 Note: You cannot claim capital allowances on leased cars.
3. Company Car Through a Limited Company
If you operate through a limited company, the company can buy or lease the car, and you (as an employee) can use it. However, this leads to a Benefit in Kind (BiK) tax charge, which is based on:
- The car’s CO₂ emissions.
- The P11D value (list price + extras).
- Your income tax band.
🔹 Electric cars have the lowest BiK rate (currently 2% in 2024/25). Petrol/diesel cars have much higher rates.
🚨 Important: If you use a company car personally, your company pays Class 1A National Insurance on the BiK value.
4. Using Your Own Car for Business
If you already own a car, you can use it for business and claim mileage expenses at HMRC’s rates (£0.45 per mile for the first 10,000 miles, £0.25 after that). This is often the simplest and most tax-efficient option for sole traders.
Best Option for company cars – self employed?
✅ For sole traders – Buying a car personally and claiming mileage is usually simpler and more tax-efficient unless it’s an electric car.
✅ For limited companies – An electric company car can be tax-efficient, but petrol/diesel cars often trigger high BiK taxes.
5. Claiming Capital Allowances on a Company Car
Businesses can claim capital allowances to reduce taxable profits when buying a car. The tax relief available depends on the car’s CO2 emissions:
- 0g/km (Electric cars) – 100% First-Year Allowance (FYA) in the year of purchase.
- 1-50g/km (Low-emission cars) – 18% Writing Down Allowance (WDA).
- Over 50g/km (Higher-emission cars) – 6% Writing Down Allowance (WDA).
This makes electric and hybrid vehicles much more tax-efficient.
6. Alternative Options: Salary Sacrifice Schemes
If you’re an employee or a director, a salary sacrifice scheme can be a tax-efficient way to finance a company car. These schemes allow employees to give up part of their salary in exchange for an electric or hybrid company car, reducing their taxable income while benefiting from lower BIK rates. Read more about this on the Octopus Energy website here.
7. Should You Lease or Buy a Company Car?
Leasing (Contract Hire):
- Lower upfront costs.
- Fixed monthly payments.
- VAT can be partially reclaimed.
- No ownership at the end of the term.
Buying (Outright Purchase or Finance):
- Eligible for capital allowances.
- No ongoing lease costs.
- Depreciation may affect resale value.
Final Thoughts: Is a Company Car Right for You?
A company car can be a valuable asset, but it’s important to consider the tax implications carefully. If your business is purchasing a car, opting for an electric or low-emission vehicle is currently the most tax-efficient option due to reduced BIK rates and 100% first-year capital allowances.
Need expert advice on making the best tax-efficient decision? Contact King and Taylor, your trusted accountants in Kent, for tailored tax planning solutions.
