When it comes to buying a car, there’s a multitude of financing options available. If you are also in a position where you are deciding between buying a car as a personal vehicle or as a company vehicle for your own business, then there are even more considerations you should make. Ensure you choose the best option for your circumstance for significant savings.
Buying a car for personal use:
Generally there is no tax relief when you buy a car for personal use. However, in instances where you are required to drive for work (not including going to and from your office) such as to visit clients or site locations, your work should reimburse you for your expenses (note: you should also make sure you have the appropriate car insurance to cover business travel).
HMRC have stipulated a fixed rate for reimbursement when an employee uses their personal car for work which is not subject to personal tax. 45p per mile is granted for the first 10,000 business miles travelled in a given tax year, and 25p per business mile thereafter. The company will then be able to claim corporation tax relief as they will deduct your reimbursement costs from their profits.
If your employer pays you over the approved mileage allowance set by HMRC, then the excess will be subject to tax and National Insurance (NI) as it will be seen as income. For example, if they pay you more to account for the additional time it takes you to travel, then anything over 45p (or 25p if you have already travelled more than 10,000 miles in one tax year) will be taxed at your personal income tax rate.
If you are the director of your own company, you can apply the same rules when using your own personal car to travel for business purposes. Be sure to keep an accurate record of mileage and keep your fuel receipts.
Buying a pool car for your limited company:
When buying a pool car outright for your limited company, you will be able to reclaim the VAT and also claim for capital allowances. Capital allowances are tax relief for assets that you purchase for your business. It allows you to calculate the tax owed from your business after the costs of assets have been deducted first. Whilst cars do not qualify for annual investment allowance (a type of capital allowance which enables you to deduct the entire cost), they can be claimed through a writing down allowance instead. This means that a part of the value of the car can be deducted each year. The amount is dependent upon the CO2 emissions. The most up to date rates as provided by HMRC are as follows:
- Vehicles with CO2 emissions of 110g/km or below are entitled to an annual 18% allowance.
- Vehicles with CO2 emissions above 110g/km are entitled to an annual 6% allowance
- Electric vehicles with CO2 emissions of 50g/km or lower are entitled to 100% allowance for the first year only.
Whilst buying a pool car may offer the most tax relief, due its strict requirements as to what will actually qualify as a “pool car”, it may not always be the best option depending on how you intend to use the vehicle.
By definition, a pool car is a company vehicle which is available to employees to use for business purposes. It should be available to all employees on the grounds of their employment, actually be used by more than one employee and only used for business purposes. As a rule, not only should there be no personal travel use on the vehicle, the company should be able to show they have taken measures to ensure there is no possibility of personal use. However, if on only minor occasions, there may be some “incidental” private use such as where an employee takes the car home in order to allow for an early start for a business trip the next morning.
Leasing a pool car for your limited company:
You may choose to lease a pool car for more affordable payments. If that is the case you will not be able to claim for capital allowances as you do not own the asset. Instead, you can claim the lease payments as a business expense. This will be subject to an allowance based on CO2 emissions. Where the car’s emission is over 110g/km your limited company will only be able to claim 85% of the lease costs, but if it is below that, then it is eligible to claim 100% of the annual lease costs against the company’s corporation tax bill. Again, in order to be considered a pool car, it cannot be used for any personal travel. Where you satisfy the requirements, as a pool car, you will be able to reclaim the VAT on the lease payments.
The difference between a pool car and a company car:
Although often used interchangeably, there is actually a significant difference. As already explained, a pool car is a vehicle that is most importantly available to all employees for business purposes only. By contrast, a company car is often made available to individual employees and allow for them to use the vehicle for their own private use. This distinction is central when it comes to the tax implication for the company.
Buying a company car for your limited company:
Where you buy a car outright through your limited company and also intend to use it for yourself outside of work, the tax relief is reduced from what was described for pool cars. Where a company car can be used for personal use, you will be unable to reclaim on the VAT on the cost of the car, but you will be able to recover VAT for business related running costs such as car insurance, MOT and servicing, etc.
What’s most important to understand when buying a car through a limited company for personal use is that it creates a benefit-in-kind (BIK). BIK is also often referred to as a company ‘perk’ or company ‘benefit’. As a receiver of the benefit, you will be taxed at your personal income tax rate (20%, 40% or 45% depending on which income band you are in) on the value of the benefit; and as the director of the limited company providing the benefit, you will need to pay 13.8% NI on the value of the benefit. You need to pay particular attention if the BIK pushes your income into the next income tax band as it may no longer be worthwhile to buy a car in this way. Additionally, in order to report the tax on the BIK, you will need to complete a P11D and P11D(b) form. Where you use an accountant to help with the financial administration of your business, you may need to pay for the additional work involved.
Leasing a company car for your limited company:
When it comes to leasing a company car there are even less tax benefits. Similar to leasing a pool car, you’ll be unable to claim capital allowances as you do not own the asset. Not only that, but there is still a BIK and so you will be liable to pay personal income tax and NI on the value of the vehicle. This is rarely the most cost-efficient method when it comes to buying a car, but the one benefit you may find is that car leasing companies will usually provide a cheaper deal to a business than for personal car leases.
In summary, when deciding the most tax-efficient way to buy a car, you need to consider many different variables such as the type of car, how it will be purchased and how it will be used. If you need help hashing out the numbers, it’s what’s we’re here for!