If you need a new car for work you may think you can buy the car in your limited company and pick up a nice tax deduction on the way through. Logic tells you this is a great idea! Tax law might inform you otherwise
Taxing a car in a Ltd Company
When a car is bought in a limited company, and provided for use by the directors or employers, it could create a ‘benefit in kind’. The car benefit is calculated using a formula which takes into account the cost of the car, additional accessories, and the energy efficiency of the car. The car benefit is higher for less efficient cars.
Once the car benefit value is calculated, two things happen:
The company could pay national insurance on that benefit at 13.8% (Class 1A NI)
The individual could have that benefit value included in their tax assessment for the year, meaning they pay income tax on the benefit.
Adding Fuel to the Fire
When the company also pays for the fuel on behalf of the director/employee this creates another taxable benefit. The same consequences mentioned in points 1 & 2 (above) will apply.
But I Use The Car Mainly for Business!
When the car is made available for private use, it is held to have been available for the whole tax year. There is no apportionment between private and business use – the tax law eliminates that subjectivity by assuming the car is used 100% private, therefore the full car benefit applies.
Tax Relief in Ltd Company Upon Purchase
The deductions are many and varied depending on the type of car, however a summary is as follows:
Cars with CO2 emissions of 50g/km or lower (not zero) – 18%
Cars with CO2 emissions of 50g/km or greater – 6%
Purely electric (new) – 100% in first year only
Purely electric (used) – 18%
Using Your Personal Car for Work Use
Your employer can reimburse you for the use of your personal car for work use. They can pay you:
45p/mile for the first 10,000 miles; plus
25p/mile for each mile thereafter
These rates are the authorised rates set by HMRC. It’s important to keep a record of the miles travelled (your employer will want to see this as proof). Any reimbursement from your work in excess of the HMRC rates will assess the excess as a taxable benefit.
If you are self employed, you can use the authorised rates to calculate the allowable deduction to include in your self assessment.
More confused than before?
The law around the taxing of cars is widely varied and constantly changing. It’s important to speak to an advisor about your specific circumstances so that you make the right decision before purchasing a new vehicle.