When it comes to buying a vehicle as a limited business owner, there are two main options: purchasing it personally or through your LTD company.

Making this decision shouldn’t be approached lightly, so it is important to do some research into both options to make the right choice for you. This article answers all the questions you may have about buying a car through your business.

Advantages of Buying a Car Through Your LTD Company

If you’re wondering whether you can claim tax after you’ve purchased a vehicle through your business, the short answer is yes.

The longer answer is that having a limited company allows you to deduct the main running costs (insurance and tax) through corporation tax, the sum of which is calculated based on factors such as the vehicle’s CO2 emissions and market value.

Corporation Tax Deductions

As we mentioned above, purchasing your vehicle through your LTD biz opens up a few corporation tax deduction doors.

When it comes to leasing over buying, the rules differ. Although you won’t be able to claim corporate tax deductions on a leased vehicle, your monthly lease payments can be put through as a business expense.

Capital Allowance

Purchasing or leasing a vehicle through your LTD company may enable you to look into something called first-year allowances (FYAs) – depending on the type of vehicle you opt for.

This is a government incentive scheme that is designed to encourage business owners to invest in lower c02 company vehicles. It allows businesses to claim 100% of the car costs (providing the vehicle is brand new/unused) against their annual profits.

The catch? The vehicle must not exceed 50kg/km of carbon emissions. 

Value Added Tax (VAT)

If you’re wondering whether you can claim VAT on your company-purchased or leased vehicle, the answer is a “yes, but…”.

VAT can only be claimed providing the vehicle is used exclusively for business journeys only (and not for personal journeys by either a company owner or employee).

Tax Implications of Using a Business Car for Personal Use

Using a business-owned vehicle for personal journeys is perfectly fine, but there are a few things to keep in mind.

Benefits In Kind (BIK) Taxes

BIK is a tax that is added when a company’s employees receive certain perks (such as a company car), as well as their salary. If you (or your employees) are using a business car for personal reasons you will be expected to pay BIK tax (AKA, company car tax). 

When it comes to calculating how much BIK tax you will be expected to pay, you will need to know the vehicle’s BIK banding (which will depend on what type of vehicle you have).

The BIK banding is awarded depending on the vehicle’s C02 emissions and its P11D (the list price). Once you have this data, you will need to multiply the P11D value by the BIK banding and then multiply that figure by your tax band (which will generate your annual tax sum). This figure then needs to be divided by 12 to provide your monthly outgoing sum.

Class 1A National Insurance Contributions (NICs)

As the business owner, you may be expected to pay Class 1A National Insurance Contributions (whereas with an employee using a company vehicle, it would be company car tax).

How much you pay will depend on whichever figure is the highest in terms of monetary value: car allowance or the BIK tax. To calculate this sum, you will need to add the cash equivalent of this particular BIK benefit liable to Class 1A NICs and then multiply the total by 13.8%.

Tax Charge for Fuel Benefit

If you build up any personal mileage on a company car or a car purchased through your company, you will be charged a fuel benefit tax.

As with BIK banding and company car tax, this sum will be based on factors including the vehicle’s C02 emissions. You can calculate this by using the Car Fuel Benefit Charge Multiplier, which is annually set by HMRC.

For example, the 2023/24 tax year car fuel benefit charge multiplier sum is £27,800.

Fuel Scale Charges

This is what is used to work out how much VAT you are expected to pay when using a business vehicle for personal journeys. By doing so, you may be able to claim VAT back on fuel used for business journeys – even if you haven’t kept a detailed log of this mileage.

Corporation Tax on Selling the Vehicle

If you sell your company vehicle, you will likely have to pay what’s called a ‘chargeable gain’ tax (which falls under the umbrella of Corporation Tax) if you plan on making a profit from the disposal of the vehicle as an LTD business owner.

If you are a sole trader or business partner, you will be expected to pay Capital Gains Tax when selling your vehicle.

Further Considerations on Buying a Car Through the Business

There are a few final factors to consider before purchasing your vehicle.

Proper Paperwork & Documentation

Accurately recorded paperwork is your lifeline as a business owner, and before you purchase or lease your vehicle, there are a few forms and documents to present – especially when it comes to paying taxes.

Firstly, when paying your NICs tax, you will need to complete a P11D form. This features key information such as the value of the benefits and the vehicle’s details. You must also be able to clearly differentiate the business and personal mileage of your vehicle’s use.

Electric Cars and Vehicles

Because the government incentivises the use of ‘greener’ vehicles, there are multiple benefits for opting for an electric vehicle (EV), including the aforementioned first-year allowance and various grants, including the plug-in car grant.

Leasing Vs Buying

Whether you opt to lease or buy is a personal choice, but keep in mind that there are additional benefits to buying, such as more capital allowance, although leasing allows you to claim your monthly lease fee as an expense.

Keep in mind that any vehicle that emits over 50g/km C02 will be subject to a 15% disallowance, which is non-refundable.

Approved Mileage Option

It may be beneficial to look into HMRC’s approved mileage option when using a vehicle for both business and personal purposes. This will reimburse you a rate of £0.45p per business mile for the first 1000 miles and £0.25p for post-1000 business miles.

To benefit from this, you must keep accurate and thorough records of your business and personal mileage. 

Final Thoughts

Making certain business decisions, such as whether to purchase a vehicle through your limited company, can be confusing and convoluted, and oftentimes, specialised financial advice is key to making the most informed decision.

Mercury Accounting & Finance offers an array of services designed for new businesses and SMEs looking to maximise profits and productivity by harnessing smooth and secure financial management. Book a free consultation today.

Disclaimer: The information presented in this blog post is accurate to the best of our knowledge and based on the latest available information as of the date of posting, which is 21st December 2023. However, please note that information, laws, regulations, and circumstances can change over time. Therefore, we cannot guarantee the accuracy, completeness, or currency of the information provided. It is always recommended to verify any information independently and consult with relevant professionals or experts for specific advice or updates. The authors and publishers of this blog post shall not be held liable for any errors, omissions, or outdated information, or for any actions taken based on the information provided in this blog post. Readers are encouraged to use their discretion and exercise due diligence in evaluating the accuracy and reliability of the information before making any decisions or taking any actions based on it.