Purchasing a car through your business
Purchasing a car through your business
Have you considered the tax implications of buying a new car?

If you are considering buying a new car, you can choose to purchase the vehicle personally or through your limited company. Both options have several significant tax implications to consider.

There are three ways in which a car can be acquired:

Option 1 Hire Purchase (HP or PCP)/Loan or Outright Purchase

If a business buys the car outright or finances it under a Hire Purchase/Loan agreement, the tax relief is given on:

  • the running costs of the car (like fuel, insurance, repairs etc.),
  • the initial purchase price of the car in the form of capital allowances. Capital allowances are a form of tax approved depreciation (please refer to the table below).

If you are operating as a limited company and use the car for private purposes, a taxable benefit may arise (please see below). 

If you operate as an unincorporated business, a private use adjustment will be applied to the car’s purchase and running costs.

Option 2 Car lease

The tax implications are very similar to option 1; however, instead of capital allowances on the purchase price, the business receives tax relief on the lease costs i.e. the monthly payment you make.

Relief is restricted on the leasing costs of high emission cars. A flat rate disallowance of 15% on the leasing cost applies to cars where CO2 emissions are exceeding 110g/km.

Option 3 Purchase or lease the car personally.

In this scenario, you will be responsible for the running costs of the car, but you will be able to claim back your business mileage.

The business owners can currently claim 45p per mile up to 10,000 miles. And 25p per mile after that. These are the HMRC approved rates and are not subject to Personal Income Tax. The limited company claims Corporation Tax relief on the amounts reimbursed.

Suppose the limited company pays more than the approved mileage rates, as mentioned above, tax and National Insurance contributions will need to be paid on the excess as this will be classed as income. Any excess mileage paid will be reported on the form P11D, with the relevant tax due after completing your tax return.

Tax relief on the initial purchase of a car

If the business purchases a car outright or using a HP/ Loan finance, the tax relief on the car’s cost differs depending on the CO2 emissions and whether it is new or second hand.

Capital allowances on cars 

2020/21

Type

Rate

First year allowances (FYA) for new and unused, CO2 emissions are 50g/km or less (or car is electric)

100%

Writing down allowances (WDA) if CO2 emissions are between 50g/km and 110g/km

18%

WDA (second-hand vehicles) if CO2 emissions are less than 110g/km

18%

WDA if CO2 Emissions exceed 110g/km

6%


Benefit in kind (BIK)

A benefit-in-kind (BIK) is any non-cash benefit of monetary value, which is treated as taxable income for tax purposes. The rate of income tax depends on whether you are basic, higher or additional rate taxpayer (20%, 40% or 45% respectively).

The UK Government aims to encourage business owners into electric cars by offering generous tax relief on the initial purchase price and low BIK rates.

The benefit in kind is calculated based on the car’s list price and CO2 emissions. At present, the company car BIK rates start at 0% for pure-electric cars, 3% for new plug-in hybrid electric vehicles (PHEV), 21% for the greenest hybrids, and 23% for any car with the emission of 100 g/km CO2 or more. From 12%, bands rise in 1% increments to a maximum of 37%, with diesel models subject to a 4% supplement should they not meet RDE2 tests. BIK rates generally change at the start of each tax year.

If you are considering buying a car in the near future, please get in touch so we can work out which method and car is the most tax-efficient option for you.

Hidden tax cost?

The BIK that can arise on vehicles with even modest emissions often makes a company car look unappetising. There is however a hidden tax cost to personally funding cars. Often the monthly repayments come with a requirement to extract additional funds from the company in the way of dividends. In the right circumstances, the BIK can be cheaper than the cost of tax on additional dividends.

Aleks Bukulak
By Aleks Bukulak Tax Accountant
If you have any questions or comments about this article, please get in touch.
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