UPDATE January 2020:
New rules came into force from 6 April 2020 for buying electric vehicles through your business. Have a read of our blog should I buy an electric vehicle for more info.
If you’re considering buying or leasing a van, check out our blog: should I buy or lease a van?
Buying a car through your company will always create a personal tax charge for you and a national insurance charge for your company. This is because HMRC expect you to have private use of your car, so you are seen to be receiving a benefit in kind that any other employee would not be entitled to (hence the tax and NIC charge).
But how much tax and national insurance?
The tax and national insurance can be quite significant, as the calculation is based on the list price of the car (even if you buy it second hand). The rules are fairly complex, but here’s HMRC’s online company car tax calculator.
For example, a VW Beetle could cost you £1,326 in personal tax (£2,652 if you are a higher rate tax payer) and £915 in employers’ NIC. (£2,241 in total or £3,567 if you are higher rate).
If the company pays for the fuel for the car, you will be paying even more in tax and NIC.
For example if fuel is provided, you’ll pay an additional £1,542 in personal tax (£3,085 if you’re higher rate) and an extra £1,064 in employer’s NIC.
For the car and the fuel, that’s a whopping £4,847 tax and NIC if you’re a basic rate tax payer, or £7,716 if you’re a higher rate tax payer!!
So, my question to you would be:
Why would you use your company’s funds to buy your car, and then be taxed on using your own car?
Legitimate ways around the tax and NIC charge:
1. Buy the car with your own personal funds (not the company’s) and charge the company 45p per mile for your business miles (25p over 10,000 miles). Here’s a blog we wrote on mileage claims.
2. Choose a commercial vehicle instead of a car. You are fairly limited here, but think van, double cab pick-up etc. Any vehicle showroom will know the classification of the vehicles it sells, so do ask, and feel free to check with us too.
If the vehicle is only for your use, you will still be hit with a benefit in kind, but only on a value of £3,350 (for 2019/2020), which means a tax charge of £670 (£1,340 if you are higher rate) and £462 employers’ NIC. So not so bad.
3. To be in a position where there is no tax or employers’ NIC, you must ensure that the car purchased by the company is treated as a “pool car”. It will need to be available to all employees, and not parked at your home address.
Claiming VAT on vehicles
You can’t claim VAT on a car, but you can on a commercial vehicle.
Corporation tax savings
The corporation tax you could claim on the purchase is very small. You can only deduct 8% of the cost of the car from your profits, and only save 19% corporation tax. So for a £15k car that’s only a saving of £228 tax.
However you can deduct the full cost of the commercial vehicle from your profits (after claiming back the VAT). That’s a tax saving of £2,850 on a £15k commercial vehicle (instead of £228 on a car).
It’s better to buy a commercial vehicle than a car through your limited company.
You’re charged quite high personal tax and NIC on buying a car through your company, but save very little corporation tax, and can’t claim the VAT.
If you buy a commercial vehicle through your company you pay little personal tax and NIC, but can save a lot of corporation tax, and can claim all the VAT back.
I hope this is of use to you, but please be aware that the above is for general guidance purposes only, and should not be relied upon as tax advice. The above figures are based on 2019/2020 tax and NIC rates.
For more specific advice please book a call with me.
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