Buying a Car Through a Limited CompanyBuying a Car Through a Limited Company

Buying a Car Through a Limited Company

Buying a car through a limited company can offer significant tax advantages and financial benefits. However, there are various considerations and legal aspects that you must keep in mind to ensure compliance and maximise savings.

Buying a car through a limited company can offer significant tax advantages and financial benefits. However, there are various considerations and legal aspects that you must keep in mind to ensure compliance and maximise savings.

Understanding the Tax Implications of Buying a Car Through a Limited Company

1. Benefit in Kind (BiK)

When a company car is available for personal use, it is considered a taxable benefit known as a Benefit in Kind (BiK). Understanding how BiK is calculated and taxed is important in making an informed decision.

2. Capital Allowances

Cars used for business purposes are eligible for capital allowances, which allow you to deduct a portion of the vehicle's cost from your taxable profits. Knowing the current capital allowance rates and how they apply to your situation is key to managing your tax liabilities.

Choosing the Right Vehicle

1. Consider the Emissions

Low-emission vehicles often qualify for higher capital allowances and lower Benefit in Kind charges, making them a tax-efficient choice. Understanding emission categories and their impact on tax can help you select an environmentally friendly and financially sound vehicle.

2. Usage and Purpose

Assess the primary use of the vehicle. If it's predominantly for business purposes, opting for a car that aligns with your business needs can maximize tax benefits. For example, vans receive different treatment to cars.

Leasing vs. Buying

1. Leasing

Leasing a car through your limited company can have specific tax advantages, such as claiming a portion of the lease costs as a business expense. Understanding the implications of this financial choice is essential.

2. Buying

Purchasing a vehicle through your limited company can also offer tax benefits through capital allowances. Evaluating the financial impact of buying a car versus leasing is crucial to making a cost-effective decision.

Tax Relief on Vehicle Costs While Buying a Car Personally

When you decide to purchase a vehicle personally, it's important to note that the initial cost of the car and associated finance expenses are not eligible for tax deduction. Furthermore, running costs such as road tax, insurance, fuel, and servicing cannot be claimed for tax relief.

However, you can claim a tax-free allowance from your company for qualifying business mileage. This allowance covers all costs related to the vehicle, including both its purchase and ongoing running costs.

Calculating Costs Using HMRC Mileage Rates

For cars or vans, you can invoice your company for a reimbursement expense of 45p per mile for the first 10,000 business miles travelled in each tax year. After exceeding this mileage threshold, the reimbursement rate reduces to 25p per business mile. These rates, approved by HMRC, remain exempt from Personal Tax. The limited company then claim Corporation Tax relief on the amounts reimbursed. 

Vehicle Type First 10,000 Miles Over 10,000 Miles
Car, Van £0.45/Mile £0.25/Mile
Motorcycle £0.24/Mile £0.24/Mile
Bicycle £0.204/Mile £0.20/Mile

Let’s understand with an example:

A freelance named John drives 12,000 business miles using a car, he can claim as below:

First 10,000 Miles 10000 * £0.45 = £4500
For Remaining 2,000 Miles 2000 * £0.25 = £500
The total amount John can claim
£4500 + £500 = £5000

The total business mileage is calculated for 12 months from 6th April to 5th April. The mileage clock restarts on 6th April each year. 

Buying a Car Through a Limited Company

Purchasing a car through your limited company in the UK can have tax implications that can significantly impact your company's finances. The tax on the purchase of a car depends on how it is financed. If you have taken a loan or it is purchased on a hire purchase, the interest of the loan is an allowable company expense. Limited companies can also claim capital allowances to get relief on the cost of the car which reduces the company’s taxable profit.

The available capital allowance for cars depends on the CO2 emission levels as below:

Cars bought from April 2021:

Description of car Claim
New and unused, electric cars or if CO2 emissions are 0g/km or lower
100% First Year Allowances
New or second-hand car with CO2 emissions 50g/km to 110g/km
18% WDA
New or second-hand car with CO2 emissions over 110g/km
6% WDA

If the car is leased but not owned, you can claim a monthly lease payment from your limited company as a business expense. 

Your limited company will also pay the running costs such as insurance and tax which are deductible from Corporation Tax.

As an individual, you can get taxable benefit in kind regardless of how the car is purchased. It is calculated based on the market value of the car and CO2 emission. You can get an additional taxable benefit in kind if your limited company pays you the fuel costs.

Reclaim VAT on Purchase or Lease of a Limited Company Car

You can only reclaim VAT if it is used solely for business purposes and not used personally by the director or an employee. Most of the contractors use cars both personally and for business purposes and in that case, reclaiming VAT is not possible. In the case of a leased car used both personally and for business purposes, you can reclaim 50% of the VAT amount.

Need Guidance?

Managing the complexity of buying a car through your limited company requires expert knowledge of both tax laws and accounting practices. A Limited Company Accountant from GoForma can provide tailored solutions to businesses in the UK, helping you make the best decisions for your unique circumstances. Book a free accounting consultation with our expert accountant today to discuss your requirements.

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