Changes from April 2020
From the 2020/21 tax year, the car benefit system will change significantly and will become a lot more attractive for low emission and electric cars.
There are a number of factors to consider when deciding whether to buy a car personally or purchase it through your limited company. The answer will depend on a number of factors including if you are VAT registered, how many business/personal miles you travel, whether you buy or lease the car, the emissions/cost of the car you are purchasing & how long you expect to keep the car for.
Purchase the car personally
Corporation tax: The company's profit figure will be reduced by 45p per mile for the first 10,000 miles and then 25p per mile after that (per tax year). This will mean a corporation tax saving at 19%.
Personal tax: There are no personal tax implications. You will be reimbursed for 45p/25p per mile, which is intended to cover fuel and running costs of the vehicle.
Example: If my business mileage for the year was 15,000 miles, I would be able to claim 10,000 x 45p + 5,000 x 25p = £5,750 back from the business. This would reduce my Limited Company corporation tax by £5,750 x 19% = £1,093.
VAT: There is no VAT recovery on the initial cost if there is any private use. The Company can claim back the VAT element on mileage equivalent to advisory fuel rates.
Example: If you have a petrol car with an engine size of 1601cc, 14p per mile is assumed to be fuel. The 14p is VAT inclusive so the VAT element is 2.33p (14p/120*20). This means that for every mile you can reclaim 2.33p in VAT. In the example above therefore, the company could reclaim £350 (£15,000 x 2.33p) in VAT.
Purchase the car through the Limited Company
Corporation tax: The company's profit figure will be reduced by:
A percentage of the initial cost of the car through capital allowances each year. This percentage depends on the car emissions as shown here
The car's running costs including MOT, servicing, insurance, repairs, hire purchase interest and road fund license.
The business mileage costs based on the fuel advisory rates here (this assumes that the director will pay for fuel personally and be reimbursed only for the business miles based on the engine size of the car - in most cases this is the most tax efficient way to avoid a personal tax charge on fuel)
Example: The company purchases a petrol car (which has 100g/km CO2 emissions and an engine size of 1601cc) for £15,000 (list price is the same). The car's running costs (excluding fuel) are £2,000 per year and the director travels 15,000 miles. In the first year the company would claim the following costs:
£15,000 x 18% = £2,700 in capital allowances against the company profits resulting in a tax saving of £513 (19%) This would be available each subsequent year until the full allowances have been claimed.
£2,000 in running costs against company profits resulting in a tax saving of £380 (19%)
15,000 x 14p = £2,100 in business mileage resulting in a tax saving of £399 (19%)
The total corporation tax saving in year one would therefore be £1,292
The director would be able to claim back the business mileage of £2,100 from the company.
Personal tax: There would be a personal tax charge arising on the personal use of a business asset this is called a "benefit in kind". HMRC have produced a calculator to work this out here.
Example: Assuming the same facts as the above example, the annual "benefit in kind" would be a charge of £3,150. This would be taxed on your personal tax return as income and at your personal tax band (20%/40%) and subject to Class 1A National Insurance at 13.8%. Therefore the charge arising would normally be in the region of £1,065 - £1,695. Note that it would also use up part of your basic rate band so you may end up paying more tax on other income. There would also be an additional cost to completing a P11d.
VAT: There is no VAT recovery on the initial cost if there is any private use. However, the company can reclaim VAT on any running expenses. The Company can also claim back the VAT element on mileage equivalent to advisory fuel rates in the same way as shown above.
The national insurance is due on the percentage multiplied by the list price of the car. For example, the car’s list price is £20,000 x 1% for 2021/22 = £200. 13.8% x £200 = £27.60 NI is paid to HMRC. You also have to pay income tax depending on what rate you fall into, a basic rate taxpayer would pay £200 x 20% (basic rate) = £40.
I would estimate that for most scenarios it would be worth investing in an electric car from April 2020 onwards for at least a few years – the taxes are tiny compared to a normal company car!
In this example:
The corporation tax saving is £199 higher if the business purchases the car.
The director will not have had to pay for the purchase of the car (£15,000) and running costs (£2,000) our of their own post tax profits. If we assume they take dividends up to the basic rate then this could amount to a tax saving of £1,275 (7.5% x £17,000) on personal tax.
The company can claim back VAT on any additional running costs of the car- so if the £2,000 costs above were all VATable, this would mean a saving of £333.
However, the director would only be able to claim back £3,650 less in a mileage claim from the business.
And, the director would be subject to a personal tax charge of £1,065 assuming they are a basic rate taxpayer.
Therefore, it seems in this case that the best option from a financial and tax perspective is to buy the car personally and claim business mileage. However this is only one example and the answer could be different based on the facts of each situation.
Complexity - as you can see it is much simpler from an administration perspective to buy the car personally and claim business mileage back.
Low emission or electric cars - where a car has emissions of less than 75g/km or is electric, you can claim 100% capital allowances in the first year - therefore the corporation tax saving in the company could be significantly more. Furthermore, these cars attract a lower benefit in kind tax. A zero emission car with a list price of £15,000 for example currently attracts a benefit in kind personal tax charge of £1,950 (£1,200 lower than the above example). However, the list prices are often higher for electric cars.
Leasing - if the company decides to lease a vehicle then the monthly lease payments are a business expense (however, there is a 15% flat rate disallowance for cars with emissions over 130g/km for corporation tax purposes). You can also claim 50% of the VAT on lease payments even if there is private use. The same benefit in kind rules as above would apply.
Vans - if the company buys a van then the company can reclaim the VAT on purchasing the vehicle. There is a fixed benefit in kind on the van and private fuel details are here
Pool cars - You may be able to avoid a benefit in kind tax charge if you make pool cars available to directors/employees. However, there are strict rules that need to apply before you can treat a car as a pool car, which means this will not work in most owner managed businesses.
Disclaimer: This guidance is based on information available for the 2018-19 tax year and is not intended to be relied upon for any means. Millward, May & Co do not take responsibility for decisions made as a result of this information or for any mistakes within.