One of the most common questions we 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.
Watch our video to learn more.
The key drivers are:
- Whether to lease or buy
- The CO2 emissions of the car and
- Your personal tax rate.
Let’s take a look at how the tax is calculated, starting with the company.
COMPANY TAX
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:
Purchased cars
The standard rule for cars is that you can claim a taxable expense each year called the writing down allowance. This is claimed as a percentage of the cost of the car.
The writing down allowance depends on the CO2 emissions of the car. If these are over seventy five grams per kilometre, the rate is eighteen percent. Over one hundred and thirty grams per kilometre and the rate is eight percent.
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 seventy five grams per kilometre or less, and must be a new car.
The company can claim corporation tax relief on the writing down allowance.
You claim VAT on the purchase of a car.
LEASED CARS
If your company leases a car, it can claim corporation tax relief on the full annual lease payment.
The company can reclaim fifty percent of the VAT on the lease payments.
The expense for corporation tax is the lease payment net of VAT.
For example
Your Limited Company leases a car for five hundred pounds plus VAT per month, which is six thousand pounds plus VAT each year.
The Company can reclaim fifty percent of the VAT for the year which is six hundred pounds.
The Company can also claim corporation tax relief on the lease payment of six thousand pounds. At the Corporation Tax rate of nineteen percent, this reduces the Companies tax bill by one thousand one hundred and forty pounds each year.
PERSONAL TAX
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 benefit 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 seven percent to thirty seven percent.
For example
If you are a higher rate taxpayer you will pay tax at forty percent on the list price of your car multiplied by the CO2 emissions percentage. If you buy a car with a list price of thirty thousand pounds and CO2 emissions of one hundred and twenty grams per kilometre your tax bill will be three thousand pounds.
So, if your personal tax bill is significantly higher than the tax saving made on the car purchase by the company then 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 the car benefit in kind. HMRC sets a standard value for fuel, called the fuel multiplier, that the CO2 percentage is applied to. In the tax year two thousand and eighteen/nineteen, the value is twenty three thousand four hundred pounds. As with the car benefit, the number of private miles you actually drive is irrelevant – it’s all or nothing.
For example
If your company pays for all of your fuel, the car has CO2 emissions of one hundred and twenty grams per kilometre and you’re a higher rate taxpayer your tax bill for fuel will be two thousand three hundred and forty pounds for the year.
Even allowing for claiming the VAT back, the company’s gross fuel bill would have to be at least seven thousand two hundred pounds to get tax relief of two thousand three hundred and forty pounds. 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 forty five pence mile (dropping to twenty five pence per mile after ten thousand 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 benefit in kind rate is only seven percent…..and there’s no fuel benefit.
We recently looked at a Tesla for one of our clients. The list price was sixty thousand pounds and the company would get tax relief on the full amount in the first year, ie it would cut the corporation tax bill by eleven thousand four hundred pounds.
As the benefit in kind rate is only seven percent, the personal tax for the higher rate taxpayer was one thousand six hundred and eighty pounds. In this case, it was very tax-efficient to purchase the car through the company.
SUMMARY
Tax on company cars is complex, so it’s always worth asking an expert before you buy.
I hope you found this useful. If you have any questions please get in touch with us at Jon Davies Accountants.