One of the most common questions I get asked is whether or not to put a car through the business. Is it tax efficient? Well, the answer depends on a few things, so I thought I’d set them out in a blog.
The key drivers (ha ha!) are:
- Lease or buy
- CO2 emissions of the car
- Your personal tax rate Let’s take a look at how the tax is calculated, starting with the company.
Your limited company can claim tax relief on a car – it’s just a question of how much. Let’s look at the two main scenarios:
1 – Purchased cars
The standard rule for cars is that you can claim a taxable expense each year – the writing down allowance or “WDA”. This is claimed as a percentage of the cost of the car.
The WDA depends on the CO2 emissions of the car. If these are over 75g/km, the rate is 18%. Over 130g/km and the rate is 8%.
If you buy a low (or zero) emission car, you can claim the full cost of the car as an expense in the year that it’s bought. To qualify, the car must have CO2 emissions of 75g/km or less, and must be a new car. (Second hand cars use the standard rules above.)
You can’t claim VAT on the purchase of a car.
Your Ltd Co buys a car for £30,000. The CO2 emissions are 140g/km.
The Ltd Co can claim tax relief on £30,000 @ 8% = £2,400. At the Corporation Tax rate of 20%, this reduces the Ltd Co’s tax bill by £480 each year.
2 – Leased cars
If your company leases a car, it can claim corporation tax relief on the full annual lease payment.
The company can reclaim 50% of the VAT on the lease payments.
The expense for corporation tax is the lease payment net of VAT.
Your Ltd Co leases a car for £500 plus VAT per month, ie £6,000 plus VAT per annum.
The Ltd Co can reclaim VAT of £600 for the year, ie £6,000 x 20% VAT rate x 50%.
The Ltd Co can also claim corporation tax relief on the lease payment of £6,000. At the Corporation Tax rate of 20%, this reduces the Ltd Co’s tax bill by £1,200 each year.
As an entrepreneur, you’re the business owner and the employee. Your business has had tax relief on the car, but what about you?
Unless the car is only used for business trips and is left at the business premises every night, you will be taxed as having a “benefit in kind” for the private use of the car.
For personal tax, it’s irrelevant whether the car has been leased or purchased. It’s also irrelevant how much private use there is – it’s all or nothing!
The value of the BIK is based on a percentage of the list price of the car. Importantly, this is the list price of the car when it was new. The actual price you paid, or the fact you bought it second hand, will not affect this list price.
The percentage then depends on the CO2 emissions of the car. The percentage is low for an electric car, and high for a fuel guzzler. The range is from 7% to 37%.
As above, your Ltd Co buys a car for £30,000. The CO2 emissions are 140g/km. Your personal tax rate is 40%.
Your tax due is £30,000 x 25% (the appropriate %age for the CO2 emissions) x 40% tax. Therefore, your tax bill is £3,000 for the year.
So, in this example, the company has saved £480 in tax on a purchased car……but you’ve got a tax bill of £3,000. In this case, you’re better off buying the car yourself.
HOW ABOUT FUEL?
If the company pays for fuel, it can reclaim VAT and claim corporation tax relief on the net cost of the fuel.
However, you’re taxed on the fuel benefit. This is calculated using the same CO2 percentage as above. HMRC sets a standard value for fuel, called the fuel multiplier, that this percentage is applied to. In 2016/17, the value is 22,200. As with the car benefit, the number of private miles you actually drive is irrelevant – it’s all or nothing.
Your company also pays for all of your petrol. As above, the car has CO2 emissions of 140g/km and you’re a higher rate taxpayer.
Your tax due is £22,200 x 25% x 40% tax. Therefore, your tax bill for the fuel is £2,220 for the year.
Even allowing for claiming the VAT back, the company’s gross fuel bill would have to be at least £6,660 to get tax relief of £2,220 so, unless you’re doing a lot of miles, it’s likely the personal tax bill will be greater than the company tax saving.
SHOULD THE COMPANY BUY/LEASE THE CAR?
It does all come down to specifics – whether you lease or buy, the CO2 emissions, and your personal tax rate.
However, it is often more tax efficient to simply purchase the car yourself. You can then charge the company for business mileage at 45 per mile (dropping to 25 per mile after 10,000 miles each year). This is tax deductible for the company…..and tax-free for you.
ARE THERE ANY EXCEPTIONS?
The obvious exceptions are low emission cars. As an example, if you have an electric car the BIK rate is only 7%…..and there’s no fuel benefit.
We recently looked at a Tesla for one of our clients. The list price was £60,000 and the company would get tax relief on the full amount in the first year, ie it would cut the corporation tax bill by £12,000.
As the BIK rate is only 7%, the personal tax was £60,000 x 7% @ 40% tax = £1,680. In this case, it is very tax-efficient to purchase the car through the company.
Tax on company cars is complex, so it’s always worth asking an expert before you buy.
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Added by Jon Davies
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