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Should I buy my car through my Limited Company?

Thinking of buying a new company car? Read this before you do!

Should I Buy My Car Through My Company?

We are often asked by clients if they should buy their next car through their Limited Company or if they should get it in their personal name. After looking at what car the client wishes to buy and crunching some numbers, the answer about 90% of the time is no; this is because of the way in which HMRC charges tax on cars provided to employees and directors.  In 2020/21 the reduction in benefit-in-kind rates applied to company cars will take effect, meaning it may soon become a tax efficient option for your Limited Company to provide you with a low emission or electric company car for personal use.

How are company cars taxed?

It’s probably best to have a quick overview of how cars provided to employees (and directors) for personal use are taxed. In essence it is the cars list price multiplied by a relevant percentage. This relevant percentage is given by HMRC and varies according to the amount of CO2 emissions the car emits.

For the tax year 2019/20 onwards, these are shown in the table below:

CO2 emissions (g/km):  2019/20 tax year
50g/km or less and fully electric vehicles 16%
51 - 75g/km 19%
76 – 94g/km 22%

For every 5g/km of extra emissions there is an additional 1% applied to the percentage rates shown above. Diesel cars that are not RDE2 certified will have an additional 4% surcharge to the percentages above. There is a maximum charge of 37% that applies, regardless of the emissions and diesel surcharge.

The list price is the manufacturer's list price, including any additional accessories and VAT. This price is always used even where the car is several years old (with an exception for classic cars).

You don’t need to worry about following the calculations outlined above as there are several websites that will show you the relevant percentage and taxable benefit for your car.

Quick example

A petrol car with a list price of £30,000 and 114g/km of CO2 emissions, the benefit amount for the tax year 2019/20 will be calculated as follows.

CO2 of 114g/km would have a relevant percentage of 26%. Calculated as (114g/km – 94g/km) = 20g/km, this divided by the 5g/km increase for extra emissions gives 4% to added to the 22% base amount.

If the car had been a non-RDE2 certified diesel an additional 4% would be added to total 30%.

The list price of £30,000 is multiplied by the relevant percentage of 26% to provide a taxable benefit of £7,800. This is the taxable benefit amount that would be subject to income tax and reportable on form P11D.

The company would have Class 1A National Insurance Contributions to pay at 13.8% of the value of the taxable benefit. This would be £1,076.40 for the example above.

Now the interesting part

From 2020/21 the relevant percentages are changing for electric and hybrid vehicles

The new rates are shown below:

CO2 emissions (g/km) Electric range in miles Relevant percentage
0g/km 2%
Between 1 – 50g/km More than 130 2%
70 - 129 5%
40 - 69 8%
30 - 39 12%
Less than 30 14%
51 – 54g/km - 15%
55 – 59g/km - 16%
60 – 64 g/km 17%
65 – 69 g/km 18%
70 -74 g/km 19%
75 – 79 g/km 20%
80 – 84 g/km 21%
85 – 89 g/km 22%
90 – 94 g/km 23%
95 – 99 g/km 24%
100 – 104 g/km 25%
105 – 109 g/km 26%
110 – 114 g/km 27%
115 – 119 g/km 28%
120 – 124 g/km 29%
125 – 129 g/km 30%
130 – 134 g/km 31%
135 -139 g/km 32%
140 – 144 g/km 33%
145 – 149 g/km 34%
150 – 154 g/km 35%
155 – 159 g/km 36%
160 and above g/km 37% maximum

What this means is that if you’re in the market for a new car and are happy to opt for a fully electric or even a hybrid vehicle putting it through the company may be the most tax efficient option. As always, an example is the best way to illustrate this.

Tesla Model S 75D

For a new Tesla with a list price of £73,505 the taxable benefit value is as follows.

Tax year Relevant percentage Taxable benefit £
2019/20 16% £11,761
2020/21 2% £1,470
2021/22 2% £1,470
2022/23 2% £1,470

In the tax year 2019/20 the relevant percentage is 16% which gives a taxable benefit of £11,761, this benefit amount is likely unattractive to most and possibly not the most tax efficient way to purchase the car.

From the year 2020/21 onwards when the relevant percentage falls to just 2% to give a taxable benefit of £1,470! A basic rate tax payer would have £294 of income tax to pay on the benefit amount. The company would pay Class 1A National Insurance contributions of £203 on the benefit amount. The difference for a basic rate tax payer in putting a Tesla Model S through the company or declaring a dividend and using that to fund the car in their own name is roughly £2,600 in additional tax paid per year. Clearly, for those who have been eyeing up a new Tesla it will be worth waiting until April 2020 and have your company pay for it!

Mercedes C350e

For a new Mercedes C350e with a list price of £39,425 the taxable benefit value is as follows.

Tax year Relevant percentage Taxable benefit £
2019/20 16% £6,308
2020/21 14% £5,520
2021/22 14% £5,520
2022/23 14% £5,520

The changes do not make a significant difference for hybrids with low electric ranges such as the C350e where the relevant percentage only falls by 2%. From the year 2020/21 onwards, a basic rate tax payer would have £1,104 of income tax to pay on the benefit amount. As the relevant percentage increases the tax advantage diminishes. Even at 14% running a C350e through your limited company will likely save enough in tax to make the additional reporting requirements worthwhile.

Other considerations

When leasing a car, the full lease payment can be deducted from profits for corporation tax purposes. If the car has CO2 emissions greater than 110g/km a 15% restriction applies, meaning that only 85% of the cost can be deducted for tax purposes.

If you purchase the car you will be eligible to claim capital allowances on the price of the vehicle. The level of capital allowances you can claim depends on its CO2 emissions. For cars with CO2 of 50g/km or less, 100% capital allowances are available in the year of purchase. Cars with higher emissions will go in either the main or special rate pool and attract writing down allowances at 18% or 6%.

If the car is being leased then you can claim 50% of the VAT incurred on the lease payments back. However, if you purchase the car outright you will most likely be unable to claim back any VAT where there is personal use. Given the tax and cash flow benefits it's clear to see why leasing is so popular amongst businesses, indeed it's what we encourage most of our clients do.

Wrapping up

The changes to be introduced from 2020/21 to the relevant percentages that apply to Ultra-Low Emission Vehicles (ULEV) and Plug-in Hybrid Electric Vehicles (PHEV) has certainly made it much more attractive from a tax perspective to ditch the high emission Range Rover with a relevant percentage of 37% in favour of a Tesla with a mere 2% relevant percentage.

As with all things tax these calculations depend on a lot of assumptions and may not be relevant to your situation. Some points to consider include the level of private and business mileage, whether the vehicle is lease or purchased, and your other income levels.

All clients of JSM Partners' benefit from quarterly tax efficiency reviews to ensure that they only pay the minimum amount of tax legally due. As part of this review we analyse the figures to give you the advice and guidance you need. With a 100% client satisfaction guarantee book a call today and discover just how we can help you.

Written in November 2018 by Joshua Tharby MSc ICPA.

Post Author: JSM Partners