If you decide to buy a car via your own limited company, there are a number of significant tax considerations to take into account. Here we’ve created a no-nonsense guide to working out the real cost.
We have already looked at the car options available to contractors in a previous article. You can either reclaim fixed mileage costs from your company when using your own vehicle when on business. Or, you may decide to buy a car through your company.
Which factors influence company car tax rates?
In simple terms, the amount of tax you pay on a company car depends on several factors:
- The list price of the vehicle.
- The CO2 emissions of the vehicle.
- What type of fuel the vehicle uses (petrol, diesel, electric).
- Whether or not your company also pays for fuel.
- Which personal income tax band the vehicle benefit costs fall in to.
How are company car benefits taxed?
If you are provided with a company car, you have to pay an income tax charge on the value of the benefit received during the year (the ‘Benefit in Kind’). Additionally, your company will have to pay Class 1A Employer National Insurance Contributions on the value of the benefit.
To calculate the charge, you will need both the list price and the CO2/g emissions of the car to hand.
You need to multiply the list price of the vehicle by a fixed rate percentage to calculate the car benefit charge.
Company car tax band percentages for 2020/21 tax year
|CO2 Emissions (g/km)||Car registered after 6th April 2020||Car registered before 6th April 2020|
|0 / (Electric Range n/a)||0%||0%|
|1-50 / ER > 130 miles||0%||2%|
|1-50 / ER = 70 to 129 miles||3%||5%|
|1-50 / ER = 40 to 69 miles||6%||8%|
|1-50 / ER = 30 to 39 miles||10%||12%|
|1-50 / ER < 30 miles||12%||14%|
|For each additional 5g, add 1%||–||–|
These rates apply to petrol and electric cars. For diesel cars, add 4% (up to a maximum of 37%). No premium applies if the diesel car is certified to RDE2 standard.
Once you have the list price and percentage to hand, you can calculate the tax liabilities for you (personally), and your company.
From 6th April 2020, the car benefit percentage for zero-emission vehicles will be reduced to zero. This will increase to 1% in 2021/22 and 2% in 2022/23. A strong incentive to consider investing in an electric car.
Car benefit charge example – registered after 6th April 2020
- So, for a car with a £30,000 list price and CO2 emissions of 110g/km, the car benefit charge for 2020/21 is 25% of the list price = £7,500.
- You then multiply this charge by the personal income tax band the charge will fall into – basic (20%), higher (40%), or additional (45%).
- So, if you’re a basic rate taxpayer, you will pay additional income tax of 20% x £7,500 = £1,500 (£3,000 if higher rate).
- On top of this, your company has to pay Employers’ Class 1A NICs on the value of the charge. In this case, 13.8% x £7,500 = £1,035.
Car fuel benefit charge – further tax
What if your limited company also pays for the fuel you use?
- To calculate this additional charge, you use the same CO2-based percentage (25% in this example) and multiply it by £24,500 (a fixed amount – 2020/21 tax year) = £6,125.
- For the taxpayer, this results in an additional income tax liability of £1,225 (basic rate), or £2,450 (higher rate).
- Your limited company will be faced with a further Employers’ Class 1A NIC liability of 13.8% x £6,125 = £845.25
Important things to bear in mind
- These examples demonstrate how company cars are taxed – in a simple way. In reality, there are many other variables and considerations to bear in mind.
- Generally, salary and any taxable benefits are taxed after the personal allowance, and before interest and dividends are added. This will determine which tax band the car charge falls into. Most contractors will be ‘basic rate’ taxpayers for these purposes if they receive low salaries from their companies.
- The capital cost of buying the vehicle is offset against your Corporation Tax bill via capital allowances. As this is spread over the life of the vehicle, you pay less company tax overall.
- You can’t normally reclaim the VAT element on a new car purchase, but you can reclaim the VAT on any running costs.
- You (or your accountant) should inform HMRC if you have acquired a company car, within 28 days of the end of the relevant tax quarter. This will result in an amendment to your tax code, and for your additional tax payments to be collected by the PAYE process.
What if your company leases a car instead of buying one?
Unfortunately, you will still face exactly the same car benefit charge if your company leases or buys a car. So, you will face the same amount of additional income tax, and the company will face the same amount of Employers’ NICs.
However, whereas you can’t generally reclaim the VAT when you buy a car, your company can reclaim 50% of the VAT payable if it leases a car. So, if the leased car costs £400 + VAT per month, the company can reclaim 50% of the VAT charged (50% x £80 = £40 per month in this example).
Are you better off using your own car?
As this guide demonstrates, company car taxation isn’t particularly simple – especially with so many variables to consider.
You need to consider the cost of:
a) the costs of buying and running your own car (out of post-tax income), and reclaiming fixed mileage rates from your company.
b) the costs of buying and running a company car (out of company income), plus the additional personal tax and Employers’ Class 1A NICs.
Remember that the costs of buying and running a car via the company, and the additional NICs are offset against its Corporation Tax bill, as are any fixed mileage rates you reclaim from your company (if using your own car).
Ask your accountant to work out which method is most tax-efficient for you, and input some different numbers into this online tool – Company Car and Car Fuel Benefit Calculator (HMRC) – to see the relative tax cost of various vehicles.
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