Getting a company car through your limited company - is it a good idea? Most contractors have to travel to work, often to a wide range of temporary workplaces, so it’s no surprise that we get so many questions about the best way to deal with business motoring costs. Well, fasten your seatbelt, set your mobile to silent and keep your eyes on the road ahead, because here comes our simple, plain language guide.
Can your limited company provide a company car?
The short answer is “yes”. If you so choose, your company can buy and run a company car. Your company can claim the cost of buying the car through capital allowances, and the running costs as expenses, which will reduce your company’s Corporation Tax bill. However, these days a company car can be quite expensive for you personally, and it may not be the best idea when you consider the overall tax position.
The Downside:
If you use your company car for any personal journeys, including commuting, it counts as a taxable benefit in kind so you would need to complete a P11D and pay income tax on the value of the benefit. Your company will also have to pay Class 1A National Insurance, which is 13.8% of this value.
How much tax will you pay on your company car?
The taxable value of the benefit in kind is calculated using the list price and the BiK (benefit in kind) rate, which is based on CO2 emissions. The list price for tax purposes includes extras, delivery costs and VAT but not the first-year registration fee and vehicle tax.
To calculate the tax on your company car:
List price X BiK rate = taxable value. You will pay tax on this value at your marginal rate, which is usually 20% or 40%.
For example, imagine your company car has a list price of £30,000 and CO2 emissions of 106g/KM.
List price: £30,000 | BiK Rate: 25% | Taxable Value: £7,500 |
Income tax for 20% tax payer: £1,500/year |
Income tax for 40% tax payer: £3,000/year |
Class 1A National Insurance payable by company: £1035 |
If your company pays for fuel
If your company pays for fuel costs as well, this attracts a further taxable benefit in kind. The standard value set by HMRC is £24,100 and it’s multiplied by the BiK rate in the same way as the car’s list price. So, to continue with the same example:
Value of fuel benefit: £24,100 | BiK rate: 25% | Taxable value: £6,025 |
Income tax for 20% tax payer: £1,205 |
Income tax for 40% tax payer: £2,410 |
Class 1A National Insurance paid by company: £831.45 |
If you’re a 40% tax payer and your company pays for fuel, the total tax cost is £7,276.45. It’s also worth noting that these are not one-off costs but must be paid every year for as long as your company provides the car to you.
Assuming no increases in tax or changes to BiK rates, in this example a higher rate tax payer would pay £21,829.35 in tax over just three years.
Selling the car
When you sell your company car, the sale price represents a profit for your company, which will attract corporation tax. If your company still owns the car when you wind it up, you will either have to buy it from your company or sell it on.
How to reduce the cost of a company car
If you’re thinking that running a company car looks rather expensive, then we agree with you. So, is there anything you can do to reduce the cost?
Go for a less expensive car
Ask yourself, honestly, do you really need a big, powerful car with a prestigious badge? Is there a business reason why you should splash out on your company car? It’s possible that there is; maybe your business relies on projecting a certain image and the car you drive is part of that, but for everyone who isn’t playing squash with a Russian oligarch this weekend, it might be worth ditching the status symbol for a more modest set of wheels. The lower the list price, the less tax you’re going to pay.
Reduce your CO2 emissions
Lower emissions give you a lower BiK rate, which will reduce the amount of tax you pay on your company car. Again, do you need the big powerful engine, or can you manage with something smaller and more economical?
It might also be worth considering an ultra-low emissions car. Cars with the lowest CO2 emissions, including those using hydrogen fuel cells, electric cars and plug-in hybrids, attract the lowest BiK rate of 9%, due to rise to 13% in tax year 2018/19.
Choose the right fuel
For Diesel cars, the BiK rate is usually 3% higher than for petrol cars, and from April 2018 a 4% surcharge will be applied on diesel models that fail to meet new “Real Driving Emissions” targets. It’s possible that contractors who drive a lot of miles might still be better off with diesel, due to fuel economy, but low-mileage drivers will definitely be better off with petrol.
London Congestion Charge
Electric cars, pug-in hybrids and others with CO2 emissions of less than 75g/KM qualify for a 100% discount on the London Congestion Charge. This won’t make a difference to everyone, but if you regularly have to travel into Central London this could be a significant saving.
Buying and running a company van
If you’re buying a company van rather than a car, the rules are slightly different. Your company can still offset the cost of buying and running the van to reduce Corporation Tax. If your company is VAT registered it can also reclaim the VAT on the purchase of the van.
The taxable value for benefit in kind is taken as a standard value of £3,350 rather than varying by the list price and CO2 emissions, so the annual costs are:
Income tax for 20% tax payer: £796.60 |
Income tax for 40% tax payer: £1,593.20 |
Class 1A National Insurance paid by company: £549.62 |
The taxable value of fuel, if your company pays it, is set at £633, so:
Income tax for 20% tax payer: £126.60 |
Income tax for 40% tax payer: £253.20 |
Class 1A National Insurance paid by your company: £87.35 |
What counts as a van?
A van is defined by HMRC as “A vehicle of a construction primarily suited for the conveyance of goods or burden (excludes people)”. The important detail is how the vehicle was constructed, not how it’s used, so even if you take the seats out of your people carrier and use it to carry goods, it still doesn’t count as a van.
There is some confusion about whether double cab pickups are included in this definition as it can be argued that they’re equally suited to carrying people. As a general rule, HMRC accepts that a double cab pickup with a payload of 1 metric tonne (1000kg) or more is a van for tax purposes. This rule only applies to double cab pickups and not to any other type of vehicle.
Using your personal car
If the company car option is looking a bit too expensive for you and you don’t like the idea of using a van, you might want to consider using your personal car instead.
When you use your personal car for business journeys, your company can reimburse you tax free for your mileage. The rate for a car or van is £0.45/mile for the first 10,000 miles in each tax year, and £0.25 after that. The mileage rate is intended to cover all the costs of using your personal car for business, including fuel, wear and tear and repairs. Your company can claim tax relief on the cost of your mileage.
Of course, this means buying the car from personal funds, which you’re likely to have paid tax on, either as salary or dividend, when you extracted them from your company, but it’s still likely to cost less because it’s a one-off cost, rather than an annual one.
If you have any questions about company cars, or if Orange Genie can help in any way, please call us on 01296 468 483 or email info@orangegenie.com.