If you’re a contractor or small business owner, you may have considered buying a car via your own limited company.
There are some important tax considerations to bear in mind when deciding whether to buy a company car or claim a mileage allowance for business use of your own car.
Use of Personal Vehicle for business purposes
Many contractors use their own vehicles for business purposes and reclaim the cost of mileage from their companies.
Since 2011, HMRC has allowed taxpayers to claim 45p per mile expenses for the first 10,000 business miles they travel and 25p per mile thereafter.
For motorcycles, there is a flat rate of 24p and a rate of 20p for normal bicycles.
You might also want to read HMRC’s approved mileage rates page to double-check the latest rates.
You can also claim an extra 5p/mile passenger allowance if you are transporting a co-employee somewhere for business purposes!
The calculation is simple, there is no reporting requirement, and you won’t be liable to pay benefit in kind charges and increased national insurance rates which apply to company-owned cars.
Company Owned Vehicle
If you decide to purchase a vehicle via your limited company, then the tax implications become more complicated.
Since 6 April 2002, the Benefit in Kind charge for company cars registered from 1 January 1998 is calculated as a percentage of the car’s price and linked to the CO2 emissions and the type of fuel it uses.
The value of the company car is determined by the official list price, regardless of any discounts you may have received from a dealer.
Your use of the company car is taxed as a ‘benefit in kind’ if you are a director or employee of a limited company, and will feature on the individual’s P11D (expenses and benefits form) each year.
Your company (as your ’employer’) has to pay additional 13.8% National Insurance Contributions on the value of the benefit each tax year. And you, as the employee will pay additional income tax on the value of the benefit.
On the positive side, your company’s Corporation Tax bill will be reduced – as, otherwise, the company funds used to pay for the vehicle would be taxed at 19%. The cost to the company is spread over time based on capital allowances rules.
In addition to the tax charge on using the company car, if your company pays for the cost of fueling the vehicle, this benefit is taxed as well. See below.
An example of how company cars are taxed
- Your company buys a new car, with a list price of £25,000.
- The CO2 emitted by the car is 116g/km. The official company car tax rate at this level (for petrol and electric vehicles*) is 24% (2018/19).
- £25,000 x 24% = £6,000
- As the employee receiving the benefit, you will pay additional income tax according to which tax band you fall into.
- If you are a higher rate taxpayer, you will be taxed at the 40% rate = £2,400 per year.
- If you are a basic rate taxpayer, you will be taxed at the 20% rate = £1,200 per year.
- In addition, your company must pay Employers’ NICs @ 13.8% on the car tax rate (£6,000) = £828.
* Diesel vehicles are taxed at a 4% premium to electric and petrol vehicles, if they are not certified to the RDE2 standard (otherwise there’s no premium).
What happens if my company pays for fuel too?
Unfortunately, if your limited company pays for your fuel, there is another additional tax charge – on top!
- For 2018/19, this is worked out by multiplying the car benefit percentage (in the example this is 24%) by a fixed amount (£23,400) = £5,616.
- So, in our example, the employee will pay an extra 20% x £5,616 if they are a basic rate taxpayer = £1,123.20 (£2,246.40 if higher rate).
- And the company will pay further employers’ NICs of 13.8% x £5,616 = £775.
So, clearly, even if you do buy a company car, it may well make sense to pay for fuel personally, as the fuel tax is considerable.
New benefit in kind rates for zero-emission vehicles from April 2020
Please note that the Government is cutting Benefit in Kind rates for zero-emission vehicles to zero for the 2020/21 tax year. This rate will rise in subsequent years – to 1% (2021/22) and 2% (2022/23). These new rates will apply retrospectively to qualifying vehicles which were registered before the 6th April 2020 implementation date.
Company car tax calculators
There are quite a few online calculators for working out your tax liability.
Try the official HMRC Car and Car Fuel Benefit Calculator to start with.
This one from Comcar is also very handy, as you can pre-select your specific vehicle – a good time saver.
IT contractors and other small business owners may be better off by using their own cars for business purposes and reclaiming the ‘mileage allowance relief’ for each mile of business use.
If you do choose to buy a company car, the amount of tax you will pay will depend largely on the CO2 emissions of the vehicle. The percentages used to work out car tax go up to 37% for highly polluting vehicles. The percentage used in our example was a mere 24%!
Of course, the company can offset the capital cost of the vehicle against Corporation Tax – so this should be taken into account when comparing your options. You may also decide to make a capital contribution each year (reducing your tax burden), and other variables will affect your overall tax liability.
If your car has high maintenance bills, or you have a ‘classic’ car, there may be a benefit in company ownership.
For obvious reasons, we strongly suggest you contact your accountant before deciding whether to purchase a company car or simply to claim back mileage costs and using your own car for business travel.