Aside from your home, your car is probably one of the biggest expenses you face and how you own this is one of our most frequently asked questions.
This blog then investigates how best to own this expensive but essential asset. Personally, or in your Limited Company.
Owning Your Car Personally
If you are a director of a Limited Company and you own your car personally using it for business use, you can claim mileage allowance of 45p for each mile up to 10,000 miles per tax year and 25p thereafter.
The 45p and 25p rates are made up of a fuel element and a wear and tear element.
If you keep receipts for the fuel you use, you can claim some VAT back on the fuel element of each mile. These rates vary depending on the fuel type and engine size.
So, a director doing 10,000 business miles a year paying their own fuel would be able to claim £4,500 back from the company and the company would get a Corporation Tax deduction of £855 on this.
There are a lot of variables, but, for example, a 3 series BMW Diesel would typically cost you around £1,000 in fuel to do the 10,000 miles.
You can lease a BMW 3 series personally from £290 a month so you can see that the business mileage (assuming you did 10,000 miles) could pay for the car (£3,480) and the fuel (£1,000) and save you £855 in Corporation Tax.
Owning the car through the business
When the business owns the car, and it is available for personal use by an individual, the car is classed as a company car.
Company cars are taxed based on their CO2 output; this determines a % of the list price that is counted as extra salary for the individual.
Going back to our fictitious BMW 3 series, the CO2 is somewhere in the region of 130g/km, and this gives us a % of 29%. If the original list price of the car was £35,000, then the extra salary equates to £10,150 which attracts tax of £2,030 @ 20% and Employers Ni of £1,300.
This is without the fuel element which HMRC calculate equates to another £6,989 extra salary which costs £1,397 in tax @ 20% and £908 in Employers NI.
This car then cost additional tax and NI of £5,635 although there is some CT saving on the NI of £419 = total tax of £5,215.
You can see that how you own your car is not a straightforward question because it depends on the car list price, CO2 emissions, the fuel type, business mileage and the marginal tax rates. However, as a direct comparison, in these circumstances, you can see leasing the car personally will cost £3,624 and through the company, it will cost £8,851.
You can see from a tax perspective; in these circumstances, the result comes down to not having your car as a company car.
The Electric Car revolution
At present and for the immediate future – All of this is turned on its head if your cars are electric or low emissions – let’s look at an electric car if you own it personally vs business ownership and do 10,000 miles a year.
You can still claim the 45p a mile rate so this would still result in an £855 Corporation Tax saving based on 10,000 miles.
Through the Company.
Electric cars have a 0% BIK rate for 20/21 this means its considerably cheaper to provide one as a company car. In addition, because electric cars attract 100% first-year allowance in the year of purchase, you save £6,655 against your Corporation Tax.
So, let’s imagine you can buy one for £35,000 then all other things being equal you will not pay any tax personally, or any fuel benefit as electricity is not considered a fuel.
So, if the running costs are something like this:
- Car – £35,000
- Fuel – £500
- Repairs – £500
- Insurance – 500
Total costs allowable for tax in year £36,500 * 19 – £6,935 reduction in your Corporation Tax.
It should be noted that if you sell the car in the future Corporation Tax will be clawed back on the sale proceeds and that the benefit in kind on electric cars is going up to 1% next year.
That said when the car is electric with low emissions (under 50g/km CO2 with greater than 130-mile electric range) than buying it through the company is the best option at the moment.
How we can help
As you will see, any tax advise varies with individual circumstances, so a one to one consultation is essential. If you are thinking of buying a car through your company, please contact us for advice.