Buying a Car Through a Limited Company

Buying a car through a limited company in the UK can be an attractive option for business owners. It offers potential tax savings and can make your business operations more efficient, especially if you or your employees frequently use a vehicle for work purposes. However, there are important factors to consider, such as how the car will be used, the tax implications, and whether it's better to buy or lease the car.

By purchasing or leasing a car through your company, you might be able to deduct certain expenses, such as fuel, insurance, and maintenance, from your business profits, reducing the amount of tax your company pays. In some cases, you may also reclaim VAT on the vehicle.

But, it's not all straightforward. There are also tax liabilities like Benefits-in-Kind (BIK) to consider, which are charged if the car is used for personal purposes. This can affect how much tax you and your company owe.

Understanding whether buying or leasing is the better choice for your company involves looking at the long-term costs and benefits. Each option comes with its own tax rules and financial commitments. With the right information, you can make a decision that suits your business and maximizes your financial advantages.

Buying a car through a limited company can offer several advantages, especially when it comes to tax savings and managing business expenses. Here’s why it might be a smart decision for your business:

1. Potential Tax Savings

One of the main reasons to buy a car through your company is the potential to save on taxes. When the car is used for business purposes, you may be able to reduce your corporation tax by claiming capital allowances. This allows you to write off a portion of the car’s cost each year, lowering your taxable profits.

Additionally, if the car is used exclusively for business, you may be able to reclaim VAT on the purchase price and running costs. Even if the car is used for both business and personal purposes, you can still claim VAT on the business portion of the expenses.

2. Cost Savings

‍In addition to tax benefits, purchasing a car through a limited company can help reduce personal costs. The company can pay for the vehicle's running costs, such as fuel, maintenance, and insurance. This can ease the financial burden on you as an individual since these expenses won't come out of your pocket directly.

3. Claiming Business Expenses

When you buy a car through your limited company, you can claim certain running costs as business expenses. This includes:

• Fuel costs: You can claim the cost of fuel for business trips.
• Insurance: Business vehicle insurance premiums can be claimed as an expense.
• Maintenance and repairs: Regular servicing, repairs, and even MOT costs are all deductible expenses.

By claiming these expenses, your company can reduce its overall taxable income, leading to further tax savings.

4. Increased Credibility

Having a company car can also enhance your business’s image, especially if you work with clients face-to-face. A professional-looking vehicle can give a positive impression, showing that your business is well-established and serious about its operations. For industries where image and first impressions matter, a company car can help build credibility with clients.

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Tax Implications of Buying a Car Through a Limited Company

When you buy a car through a limited company, it affects your taxes in different ways. Understanding how the car is treated for tax purposes can help you decide whether it's a good move for your business.

1. Benefit in Kind (BiK)

If you use the car for personal reasons, HMRC sees it as a Benefit in Kind (BiK). You will have to pay tax on this personal use, but the tax rate depends on the car’s CO2 emissions. Generally, cars with lower emissions have lower BiK taxes.

2. Capital Allowances and Write-offs

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 limited 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:

Capital allowances allow you to deduct the cost of the car from your company’s profits over time. The type of capital allowance you can claim depends on the car's emissions:

• 100% First-Year Allowance: For electric cars or cars with very low CO2 emissions (50g/km or less), you can deduct the full cost of the car in the first year.
• Writing Down Allowance: For cars with higher emissions, you can claim a percentage of the car's cost each year (typically 18% for cars with emissions below 110g/km, and 6% for higher).

3. VAT Reclaim Opportunities

If your company is VAT-registered, you might be able to reclaim VAT on the purchase of the car. However, this only applies if the car is used strictly for business purposes. If there’s any personal use, you won’t be able to reclaim the VAT. In contrast, for vehicles used solely for business, such as vans or electric vehicles used exclusively for work, the company can reclaim 100% of the VAT.

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.

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When deciding whether to lease or buy a car through your limited company, it’s important to weigh the pros and cons of both options. Each has its own tax benefits and financial considerations that can affect your business in different ways.

1. Benefits of Leasing a Car

Leasing a car means your company rents the vehicle for a fixed period. Here are some key benefits:

• Lower upfront costs: Leasing generally requires lower initial payments than buying, making it easier to manage your cash flow.
• Tax advantages: Your company can usually deduct the full cost of the lease payments from its taxable profits. This can lead to significant tax savings, especially if the car is used solely for business purposes.
• No depreciation worries: Since you don’t own the car, you don’t have to worry about its value dropping over time.
• Easy upgrades: Leasing allows you to upgrade to a new car every few years without having to sell the old one, which is great for businesses that want to maintain a professional image with newer models.

2. Benefits of Buying a Car

Buying a car means your company owns it completely after purchase. Here are some advantages:

• Ownership: Once your company buys the car, it becomes a business asset. This means you can use it for as long as you like without any further payments.
• Capital allowances: When you buy a car, your company can claim capital allowances to reduce your taxable profits. Cars with lower CO2 emissions may qualify for 100% first-year allowances, meaning you can write off the full cost in the first year.
• No mileage restrictions: Unlike leasing, buying a car doesn’t come with mileage limits. If your business uses the car a lot, this could save you from excess mileage fees.

3. Tax Treatment and VAT Reclaims

• Leasing: Lease payments are considered business expenses, so your company can deduct them from its taxable profits. However, only 50% of the VAT on lease payments can be reclaimed if the car is also used for personal trips.
• Buying: When buying, you can’t deduct the purchase cost directly. Instead, your company can claim capital allowances over time. The amount you can claim depends on the car’s emissions. You may also reclaim some or all of the VAT if the car is used exclusively for business.

4. Flexibility and Long-Term Costs

• Leasing offers more flexibility in the short term, with lower upfront costs and the option to switch to a new car every few years. However, long-term leasing can be more expensive since you never own the car and continuously pay for it.
• Buying is usually more cost-effective in the long run if you plan to keep the car for many years. Once the car is paid off, your company no longer has to make payments, and it remains an asset.

As a business owner, you can choose between buying a company car or using your personal car for business and claiming mileage allowance. Both options have their advantages, but the right choice depends on how often you use your car for work and your company’s financial situation.

Buying a Company Car

When you buy a car through your limited company, the business owns the car and pays for all its expenses, including fuel, maintenance, insurance, and repairs. This can lead to tax benefits, such as claiming capital allowances and, in some cases, reclaiming VAT. However, if you use the car for personal reasons, you will have to pay Benefit in Kind (BiK) tax. This tax is based on the car's value and CO2 emissions, and can sometimes make the company car option more expensive.

Mileage Allowance

If you use your personal car for business trips, you can claim mileage allowance instead of buying a company car. HMRC allows you to claim 45p per mile for the first 10,000 miles and 25p per mile after that. This is designed to cover your fuel and car maintenance costs. The good thing about this option is that you don’t have to worry about Benefit in Kind tax, as the car is your personal asset.

When Buying a Company Car Makes Sense

• You drive a lot for business purposes.
• You plan to buy an electric or low-emission car, which has lower BiK tax.
• The company can cover fuel, insurance, and other running costs.
• You want to take advantage of capital allowances and VAT reclaim opportunities (if applicable).

When Claiming Mileage Allowance Makes Sense

• You don’t use your car for business frequently.
• Your business trips are limited, and the mileage allowance is enough to cover your costs.
• You want to avoid paying BiK tax.
• You prefer to keep the car as your personal asset and reduce the company’s expenses.

If you use a car for business purposes, you can claim mileage and fuel costs, which helps reduce your company’s taxable income. Whether the car is owned by the company or personally owned but used for business trips, understanding how to claim these expenses correctly is important for maximizing tax savings.

Claiming Fuel Costs for a Company Car

If your company owns the car, you can claim all fuel expenses for business trips as a business cost. This includes petrol, diesel, and even electric vehicle charging. However, it’s essential to separate personal use from business use.

For accurate claims, you’ll need to keep detailed records of your business trips, including the purpose of the trip, the date, and the number of miles driven. The company can reimburse you for fuel costs, and these can be deducted from your company’s taxable profits.

Claiming Mileage for a Personal Car

If you use your personal car for business trips, your company can reimburse you using mileage allowance. This allows you to cover fuel and wear and tear costs without having to go through complicated fuel claims. The UK government sets fixed rates for mileage claims to keep things simple:

Let’s understand with an example:

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

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

Purchasing or leasing a car through your limited company can be a great financial move. Here’s a step-by-step process:

1. Determine Your Needs
   Start by analysing your requirements. Consider how often you'll use the car for business, the type of vehicle you need, and whether you prefer leasing or buying. Think about factors like size, fuel type, and budget.
2. Set a Budget
   Decide how much your company can spend on the car. Include all costs such as purchase price or monthly lease payments, insurance, maintenance, and fuel. Setting a clear budget helps you avoid overspending.
3. Research Vehicles
   Look for cars that fit your needs and budget. Compare different models, fuel types, and prices. Pay attention to CO2 emissions, as this will affect tax implications and benefits.
4. Get Quotes
   Whether you plan to buy or lease, gather quotes from different dealerships and leasing companies. Compare prices, terms, and any additional costs, such as maintenance packages or warranties.
5. Check Financing Options
   If you decide to buy, explore financing options. You may need a loan or other financing arrangements. Ensure the terms are manageable for your business.
6. Consult with Your Accountant
   Before making any decisions, speak with your limited company accountant. They can provide valuable insights into the tax implications of buying or leasing a car through your limited company. They’ll help you understand the potential benefits and drawbacks based on your specific situation.
7. Make the Purchase or Lease Agreement
   Once you’ve decided on a vehicle and financing, finalise the purchase or lease agreement. Read all terms carefully and ensure you understand your obligations. If leasing, confirm the duration and monthly payments.
8. Register the Vehicle
   If you buy the car, register it in your company’s name. This step is important for tax purposes and ensures that the car is officially recognised as a company asset.
9. Claim VAT (If Applicable)
   If your business is VAT-registered and you bought a car used exclusively for business, you may be able to reclaim the VAT on the purchase. Ensure to keep all invoices and documentation.
10. Maintain Proper Records
    Keep detailed records of all expenses related to the car, including fuel, maintenance, and insurance. Good record-keeping will make tax reporting easier and ensure you can claim all eligible deductions.

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Need Guidance?

Buying a car through a limited company can offer tax savings and business benefits, but it’s important to weigh these against the potential tax liabilities and costs. Consider your business’s needs and how much you will use the vehicle for work. If your usage is significant, buying a car through your company may be beneficial. However, if you only need a car occasionally, claiming mileage for your personal car could be more cost-effective.

To make the most of your decision, it’s best to consult with an accountant for limited company who can guide you on how to maximise your tax benefits while ensuring the option is financially sound for your company.