Tips for making the right decision
As a business owner, if you are trading via a limited company then it might seem like an obvious decision, when you’re in the market for a new motor, to purchase a car through your company. However, it’s important to understand not only the benefits but the drawbacks of taking this approach before you take that leap.
Perhaps the most obvious reason for purchasing the car through your company is that you will be entitled to claim a tax-free allowance for any trips you take in it that qualify as ‘business mileage.’ You’ll also be able to claim some of the purchase and running costs of the car. As far as running costs are concerned, within UK law, you are entitled to a reimbursement of 45p for each mile you travel in the first 10,000 miles of every tax year and 25p after that. As a sole trader, there’s no legal separation between yourself and your business, but you can still claim tax relief.
Buying secondhand makes sense from an economic perspective, as cars lose their value significantly over time. You’re more likely to find reasonable deals if you head to online secondhand showrooms like Unbeatable Car when buying individual company cars. Whilst brand new cars might offer more mileage, the turnaround with company cars is also generally rather high. If you’re buying a fleet of cars for your employees, however, understand that fleet purchasing power direct with a manufacturer will always be greater. At a second-hand showroom they are pricing vehicles individually and have little incentive to offer fleet discounts.
If you decide to lease a car through your company instead of buying, the payments can be claimed as an expense, though if the car in question emits more than 110g/km of CO2, 15 percent of that payment will not be deductible. Also, note that you can usually only claim 509 percent of the VAT on a leased car.
Using Your Car
Although the initial cost of your own personal company car isn’t tax deductible, you can claim an allowance for business mileage, which conforms to the same rules stated previously (45p per mile for the first 1,000 miles per year). If you already own a car and feel like it will be up for the task, you might want to take this approach. Note, however, that driving to and from your office is not considered business mileage, so if you’re only using your own car to commute, you might not be able to reclaim any VAT.
- VAT can be claimed on cars that are kept at the office overnight and are used by different employees.
- A limited company will need to pay Employers Class 1A NICs.
- The level of CO2 emitted by the car will determine the rate at which the cost can be written off, so it’s in your best interests to purchase more efficient motors.
- Company car use is a taxable benefit and these are included in your earning for the year.