Buying a car through your limited company sounds like a great way to save tax. But in most cases, it’s more tax-efficient to buy the car privately and claim mileage. In this article, we’ll explain why this is and what you can claim.
To keep things simple, this article only applies to company directors buying cars. If you’re buying a van or commercial vehicle, or if you’re a sole trader, things are different. The same goes for taxis, driving instructors and cars bought for self-drive hire. In any of these circumstances, you should contact us or your accountant for advice.
As a company director, you have two options when it comes to buying a car: you can buy/lease it yourself and claim business mileage as an expense; or the company can buy/lease the car and get a tax break on some of the costs.
The first option, claiming mileage, is usually more tax-efficient, unless you’re buying a fully electric car, or a hybrid with very low emissions (as explained below).
Why shouldn’t I buy my car through my company?
The main problem here is that directors are classed as employees and are therefore subject to “benefit in kind” tax for their private use of any car owned by the company. You can use HMRC’s calculator to get an idea of what the benefit in kind tax on a car might be. You’ll need details including the car’s list price, fuel type and CO2 emissions. For hybrids, you’ll also need the “pure electric range”.
Moreover, the company will have to pay employer’s NI on the value of the benefit.
Although the company can reclaim some running costs and a portion of the purchase cost, thereby reducing its corporation tax, the benefit in kind tax and employer’s NI on company cars mean that it’s almost always more tax efficient for a director to buy or lease their car privately and claim mileage.
Benefit in kind tax and employer’s NI apply to leased cars as well. So even if the company leases the car rather than buying it, claiming business mileage is usually your best bet. However, there are exceptions…
Is it ever worth buying a car through my company?
The rules for benefits in kind on electric and hybrid cars changed from April 2020. This means that if you’re buying an electric car with no CO2 emissions or a hybrid with very low CO2 emissions and a high “pure electric range”, it may be more tax efficient to buy it through your company rather than buying it privately and claiming mileage. Everyone’s situation is different, so if you’re considering this sort of car, it’s worth contacting your accountant and asking them to crunch the numbers.
If the car is a pool car, you should buy it through the company. A pool car is a car that is available to all employees, that no employee can use for personal use, and which is parked at the business premises, not an employee’s or director’s home address.
How do I claim business mileage?
As discussed, if you’re going to use the car for private and business travel, it’s easier and almost always more tax efficient to buy it privately and claim business mileage. This works as follows.
1. You buy (or lease) the car privately, just as you would if you weren’t a company director.
2. You keep a log of your business travel. This is simply the number of miles you drive in your car for business purposes. Trips to clients, suppliers, conferences, training days and your accountant all count as business travel. Your daily commute to work doesn’t. You can use an app such as MileIQ to track your mileage, but a spreadsheet listing your business journeys and the distance travelled would also be fine.
3. Multiply the number of business miles you’ve done by HMRC’s business mileage claim rates. Currently these are 45p per mile for the first 10,000 miles annually, and 25p per mile for any further miles.
For example, say in one year you do 16,000 business miles.
10,000 x 0.45 = £4,500
6,000 x 0.25 = £1,500
Adding these together gives £6,000.
4. Your company reimburses you for this amount and puts it through on its accounts as a business expense, reducing its profits and therefore its corporation tax bill. There’s no benefit in kind tax for you. It’s that simple.
NB If you use the mileage method, then the cost of the vehicle, maintenance, fuel, insurance and road tax all have to be paid for privately by the director. You can’t claim these as an expense for the company. You can only claim the mileage.
If you have any questions about buying cars, vans or other vehicles through your company, don’t hesitate to get in touch.