The simple answer is yes. But should you?

If you’re running a limited company, you might have wondered whether buying a car through your business is a savvy financial move. This decision isn’t as straightforward as it might seem and involves weighing the benefits, tax implications, and alternatives. Let’s explore this topic in detail.

The Appeal of Buying a Car Through Your Company

For many business owners, the idea of owning a company car is appealing. After all, it’s a tangible perk that reflects success and offers potential tax benefits. However, like most business decisions, it’s important to understand the finer details.

Potential Benefits

• Tax Relief on Purchase: Your limited company can claim capital allowances on the cost of a car. This can reduce the company’s taxable profits. The amount of relief depends on the car’s CO2 emissions:
  • 100% First-Year Allowance: Available for electric or ultra-low emission vehicles (0g/km CO2 emissions).
  • Writing Down Allowances: 18% per year for cars emitting up to 50g/km and 6% for cars with emissions over 50g/km.
• Claiming Running Costs: Expenses such as fuel, maintenance, repairs, insurance, and road tax can be claimed as allowable business expenses. This reduces the overall profit on which the company pays Corporation Tax.
• VAT Reclamation: If your business is VAT-registered and the vehicle is exclusively used for business purposes, you may reclaim the VAT on the purchase price and running costs. However, if there’s personal use, VAT reclamation is typically restricted.

Challenges to Consider

• Benefit in Kind (BiK) Tax: If the car is available for personal use, you’ll need to pay BiK tax. The tax is calculated based on the car’s list price and its CO2 emissions, and for higher-emission cars, this can be a significant amount.
  • Electric Cars: BiK rates for electric vehicles are incredibly low—currently at 2% for the tax year 2024/25. This makes electric cars one of the most tax-efficient choices.
  • Petrol and Diesel Cars: Cars with higher CO2 emissions attract significantly higher BiK rates, which can erode the financial benefits of owning them through your company.
  • Hybrid Cars: The BiK rates for hybrids vary depending on their CO2 emissions and electric-only range. For example, a hybrid with emissions under 50g/km and an electric range over 130 miles will benefit from lower BiK rates.

Let’s see how the numbers work.

For a petrol car with a list price of £30,000 and CO2 emissions of 130g/km, the BiK rate might be 30%. This results in a taxable benefit of £9,000. If you’re in the 40% tax bracket, you’d pay £3,600 in BiK tax annually.

In contrast, an electric car with the same list price at a 2% BiK rate would result in a taxable benefit of £600, leading to a tax liability of just £240 annually.

• Employer National Insurance Contributions (NICs): Your company must pay Class 1A NICs on the BiK value. While this may not seem like a huge sum initially, it’s an added cost to consider.
• Depreciation: Cars are depreciating assets. While you can offset some of this through allowances, the drop in value could still outweigh the perceived benefits.

Leasing a Car Through Your Limited Company

An alternative to outright purchasing is leasing. Leasing allows you to use the car without owning it, which has its own set of advantages and drawbacks.

 Why Lease?

• Lower Initial Costs: Leasing typically requires a smaller upfront payment than purchasing, preserving your company’s cash flow.
• Tax-Deductible Payments: Lease payments are generally tax-deductible. If the car’s CO2 emissions are 110g/km or lower, you can deduct the full amount. For higher-emission vehicles, only 85% of the lease payments are deductible.
• VAT Reclamation: Like purchasing, if the car is solely for business use, you can reclaim 50% of the VAT on lease payments.
• Avoid Depreciation: Since you don’t own the car, depreciation isn’t your concern. At the end of the lease, you simply return the car or renew the agreement.

What Are the Drawbacks?

• No Ownership: Leasing means the car never becomes an asset of your company, and you’re effectively renting it for the duration of the lease term.
• Mileage Restrictions: Many leases come with mileage caps, and exceeding these limits can result in additional charges.
• BiK Tax Still Applies: Just like owning a car, leasing doesn’t exempt you from BiK tax if the vehicle is available for personal use.

Using Your Personal Car for Business and Claiming Mileage

For many small business owners, using a personal car for work and claiming mileage expenses is a simpler and more cost-effective option.

Advantages

• No BiK Tax: Since the car isn’t owned by the company, there’s no taxable benefit to consider.
• HMRC Mileage Rates: You can claim tax-free mileage at HMRC-approved rates, which are designed to cover fuel, wear and tear, and other running costs. The current rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter.
• Flexibility: You maintain complete control of the vehicle and avoid the administrative burden of tracking its use for tax purposes.

Downsides

• Personal Responsibility for Costs: While mileage claims cover a portion of the costs, the initial purchase, maintenance, and depreciation of the vehicle remain your responsibility.
• Potential Wear and Tear: Extensive business use can lead to faster depreciation of your personal vehicle.

Which Option Is Right for You?

Choosing the best option depends on your circumstances, including the nature of your business, the type of car you want, and how much it will be used for personal versus business purposes.

Key Questions to Ask Yourself

• How Much Will You Use the Car for Business?
  • If it’s mostly for business use, purchasing or leasing through your company might be advantageous. If not, claiming mileage on a personal car could be simpler.

• Do You Want to Avoid BiK Tax?
  • If the car is intended for both business and personal use, the BiK tax liability could outweigh the benefits of owning a company car.

• What Are Your Cash Flow Considerations?
  • Leasing requires lower upfront costs but comes with ongoing payments. Purchasing is a larger initial investment but could provide long-term benefits.

• What’s the Environmental Impact?
  • Choosing an electric or low-emission vehicle not only reduces environmental impact but also offers more favourable tax treatment.

Final Thoughts

Buying a car through your limited company isn’t a one-size-fits-all solution. While it can provide tax relief and streamline expenses, the associated costs, such as BiK tax and NICs, might diminish its attractiveness. Leasing offers flexibility and eliminates depreciation concerns but comes with its own restrictions and costs. Meanwhile, using a personal car for business and claiming mileage is a straightforward alternative that avoids complex tax implications.

Consulting with an experienced accountant or tax advisor can help you navigate this decision, ensuring you choose the option that aligns with your financial goals and business needs.