Whether you are meeting the client, travelling to a conference or simply visiting the post office, chances are you may need to use a car. But, is it better to use your own car or to buy one for the company?
As often with accounting related questions, there is no straight answer that fits all circumstances. We hope that by highlighting the main aspects and different options, we will equip you with knowledge to help to make the right decision for your business.
Using your own car
If you own a car personally, you are allowed to use it for business and claim so called mileage allowance. Claiming mileage allowance is probably the easiest option as it does not require any additional arrangements. All you have to do, is to keep a log book of weekly or monthly miles used for business travel, which you can then claim as an expense. The current rate for the allowance is 45p per mile for the first 10,000 miles, and 25p per mile thereafter. It is a fixed amount and applies to any vehicle, irrelevant of type of fuel or co2 emission. Good news in this approach are, since it is a business expense, it reduces your corporation tax.
However bear in mind, that when claiming mileage allowance, you are not allowed to include any additional costs relating to the car e.g. maintenance, MOT, servicing or insurance. The amount of 45p per mile is already covering these costs alongside with the cost of fuel.
Using company’s car
As with anything there advantages and disadvantages of buying the car through the company. The main thing to consider is whether you will be using this car just for business or will you use it personally too.
Advantages of buying the car through the company
Below are some of the main advantages when buying the car for your company
Company pays for the car This is probably the biggest advantage and cost saver. You don’t have to draw salary or dividends to meet the cost, so there is no additional income tax. Additionally the company will be allowed to claim capital allowances, which reducing corporation tax payable, further details under section Corporation tax and purchase of the car.
Company pays for running costs When the maintenance and servicing costs are high, it may be more advantageous for the company to purchase the car. Especially beneficial in the situation when the running costs are greater than the combined tax and NI charges for benefit in kind. Additionally if you are buying ‘classic cars’ it also might be beneficial to buying through the company, as the maintenance and running costs are especially high.
Depreciation is a company cost If you want to buy the car which is highly depreciating, it might be beneficial to purchase it through the company. In this case you keep it for 6 months or a year, which is the period of time when the car is depreciating the most. Once the car price falls down, you can purchase the car from the company and the company will bear the loss in value.
On the other hand we have to consider different costs associated with using the company car.
Corporation tax and purchase of the car
The good news are that you will be able to claim capital allowances against your corporation tax bill. There are three categories of capital allowances claims.
If the CO2 emissions of the car are 75g/km or less or car is electric, you can claim 100% of the cost of the car from the company’s profits in the year that you buy the car. To qualify however the car has to be bought brand new.
If the CO2 emissions of the car are between 76g/km and 130g/km then you can deduct 18% of the price of the car from company’s profit each year (on the reducing value basis - which means that although the percentage is fixed at 18% the amount, we apply it to, changes each year, as we are using the book value, see the example below)
For CO2 emission levels above 130g/km then only 8% of the price of the car (also on the reducing value basis) can be deducted from your company’s profit each year.
You buy a car through your company for £27,000 and its CO2 emission is 120g/km. The capital allowance will be £27,000 @ 18% = £4,860 This reduces the company’s corporation tax bill by £923.40 (£4,860 x 19% corporation tax rate) New book value is £27,000 - £4,860 = £22,140, and this amount will be used for capital allowance calculation next year.
If the car was bought new, electric for £27,000 then the whole amount would have been claimed as capital allowance and reduction in corporation tax would have been £27,000 x19% = £5,130 in the year of purchase.
Benefit in kind - use of a car
When you are using company’s car for personal or non-business related activity, it means you are receiving so called benefit in kind.
To calculate the amount of benefit in kind, we have to use the list price of the car, also sometimes called P11d value of the car. This is not the price, which was actually paid for the car or its second hand valuation, but the price of the car when it was new, including extras and VAT, but without the first year registration fee and vehicle tax. The list price is then multiplied by the percentage, based on the CO2 emission ranging from high for diesel cars at 37% to low for hybrid and electric cars. The diesel cars attract additional 4% with maximum of 37%.
Also to bare in mind is that there is no difference in calculation whether the car is purchased outright or leased. Have a look at below example that illustrates costs associated with using company’s car through benefit in kind.
The list price of the car you purchased through company is £27,000 and its CO2 emission is 120g/km, and it is a diesel car. Your personal tax rate is 20% (basic rate). The tax due is £27,000 x (25% percentage for the CO2 emission + 4% additional for diesel) x 20% basic tax rate
Therefore your personal tax bill for the private use of the car is additional £1,566. If you higher tax rate payer, the tax payable will be even higher.
Additionally to the benefit in kind, the company will be liable to Class 1A National Insurance on the benefit for private use of the company car at the rate of 13.8%. In our example above the NI Class 1A would be £1,080.54.
Benefit in kind - fuel
If company pays for the private use fuel, there is a fixed number given for benefit in kind, which is irrelevant of the number of miles done.
Your company pays for all of your fuel, for business trips and private ones. The CO2 emission is 120g/km and you are paying your personal tax at basic rate of 20%. The tax due is £23,400 (as at 2018/19) x 29% (the percentage for CO2 emissions + additional 4% for diesel) x 20% tax Therefore your personal tax bill for company paying for your private journeys fuel is £1,357.20. Additionally the National Insurance Class 1A, as explained above will be £936.47 payable by company.
Using your personal car will allow you to claim mileage allowance on all business travel, but you have to personally bear the costs of fuel, insurance and servicing.
If you consider buying the company car, you will be able to offset all the costs for running it and additionally you will have capital allowances available, which decreases corporation tax payable. However on the other side you have to count benefits in kind if the car will also be used for non-business related travel.
The reasons above are strictly from accounting and tax perspective. Before making decision however make sure you take other factors into account, eg is it commercially viable to purchase company car or will business benefit it from it.