Buying your car through your business can be a smart tax planning decision, but it can also create company car tax, National Insurance and benefit-in-kind issues. If your limited company buys a car and you use it personally, the tax position depends on the car’s list price, CO2 emissions, fuel type and how the vehicle is used.

This episode helps business owners think through whether a company car makes sense, especially when comparing petrol, diesel, hybrid and electric cars. We also look at the alternative of buying the car personally and claiming business mileage from the company.

About this episode

Cars are a common business question, especially for directors and limited company owners. Should the company buy the vehicle? Should you buy it personally? What happens if you use it for both business and private journeys?

In this episode, we look at how company car tax works for the individual and the business. We cover company car benefits, electric and hybrid cars, CO2 emissions, capital contributions, and mileage claims.

This follows on from our episode on Saving Tax with Company Benefits, where we looked at tax-free and trivial benefits.

Why company car tax matters

Company car tax matters because a car used personally is normally treated as a benefit. That can create a tax charge for the person using the car and a National Insurance cost for the company.

Travel between home and work is normally treated as private use, not business use. Therefore, even a car used mainly for work can still create a taxable benefit if there is personal use.

The decision is not just about whether the company can afford the car. It is about the overall tax cost, running costs, cash flow, business mileage and whether the vehicle supports the business properly.

Key points from this episode

What is a company car?

A company car is a car bought or provided by your limited company and made available for your use.

This episode focuses on cars used to carry people, not vans designed mainly to carry goods. Vans can have different tax treatment, so it is important not to mix the two.

If the company car is available for private use, a benefit-in-kind charge may arise. That means you may pay tax personally, and the company may have National Insurance to pay.

How company car benefit is worked out

There are three key numbers to consider when looking at company car tax:

• How the car is powered, such as petrol, diesel, hybrid or electric.
• The manufacturer’s list price of the car.
• The CO2 emissions of the car.

The benefit value is broadly based on the car’s list price multiplied by a percentage. That percentage depends on the vehicle’s emissions and fuel type.

The lower the CO2 emissions, the lower the percentage tends to be. The higher the emissions, the higher the benefit charge can become.

Why electric and hybrid cars can be attractive

Electric and low-emission cars can be attractive because the benefit-in-kind percentage is usually lower than for higher-emission petrol or diesel cars.

That can reduce the personal tax charge for the driver and the National Insurance cost for the company.

Hybrid cars can also receive favourable treatment, but the tax position can depend on emissions and electric range. Because rates change by tax year, always check the current figures before making a decision.

CO2 emissions and list price

The list price matters because company car tax is not based simply on the deal you negotiated or the amount the company paid.

The calculation usually starts with the manufacturer’s list price, including VAT and relevant accessories. Then the appropriate percentage is applied.

That means a discount at the dealership may help cash flow, but it may not reduce the taxable benefit in the way business owners expect.

Making a contribution towards the car

You may decide to make a capital contribution towards the car. This could happen if you want a more expensive vehicle than the company is prepared to fund.

A capital contribution can reduce the benefit value, subject to the relevant rules and limits. That can create tax savings for the individual and National Insurance savings for the company.

However, this needs proper calculation. The tax saving must be compared with the cash contribution you make.

Buying the car personally and claiming mileage

Buying through the company is not the only option. You may decide to buy the car personally and charge the company for business miles.

This can be simpler in some cases, especially if the car has significant private use or if the company car benefit would be high.

Approved mileage rates can allow tax-free reimbursement for genuine business mileage. However, these rates can change by tax year, so check the current mileage allowance before relying on old figures.

Example company car calculations

Company car calculations can help show how the benefit affects both the individual and the company. However, the rates and percentages change by tax year, so check the current figures before relying on any example.

The main idea is to compare the company car route with personal ownership and mileage claims before making a decision.

What to check before deciding

• Is the car being bought by a limited company?
• Will there be any private use?
• What is the manufacturer’s list price?
• What are the car’s CO2 emissions?
• Is the car petrol, diesel, hybrid or electric?
• Will you make a capital contribution?
• Will the company pay for fuel?
• Would personal ownership plus mileage claims be simpler?
• What are the current benefit-in-kind rates?
• What will the company need to report to HMRC?

If VAT recovery is part of your decision, our episode on Claiming back VAT on cars is a useful next step.

FAQs about buying your car through your business

Can my business buy my car?

A limited company can buy or provide a car, but if you use it personally, a company car benefit may arise. That can create tax for you and National Insurance for the company.

Is travelling from home to work business mileage?

Travel between home and your normal workplace is usually treated as private travel. That means it can count as personal use for company car purposes.

Are electric company cars tax efficient?

Electric company cars can be tax efficient because lower-emission vehicles usually have lower benefit-in-kind percentages. However, rates change, so always check the current tax year before deciding.

Is it better to buy the car personally and claim mileage?

It can be better in some cases. If the company car tax cost is high, personal ownership plus business mileage claims may be simpler and more tax efficient.

Episode Timecodes

• 00:00 – Introduction to company cars and tax
• 00:28 – Should you buy your car through your business?
• 00:52 – Link with company benefits and tax planning
• 01:19 – Electric and hybrid cars
• 01:36 – What counts as a company car?
• 02:02 – Private use and company car benefits
• 02:27 – Tax for the individual and National Insurance for the company
• 02:47 – The three key numbers in company car tax
• 03:26 – List price, CO2 emissions and the benefit calculation
• 04:17 – Personal contributions towards the car
• 05:02 – CO2 emissions and tax treatment
• 06:39 – Example company car benefit calculation
• 07:24 – Company National Insurance and running costs
• 08:08 – Electric cars and tax treatment
• 08:28 – Hybrid cars and electric range
• 09:45 – Capital contributions and tax savings
• 10:49 – Buying personally and claiming business mileage
• 11:31 – Final thoughts before deciding

Related episodes

• Saving Tax with Company Benefits
• Claiming back VAT on cars
• Sole Trader or Limited Company: Which Is Best for You?

Key takeaway

Buying your car through your business can be tax efficient, especially where the vehicle has low emissions, but it is not automatically the best option.

The right answer depends on the car, the list price, emissions, private use, business mileage, company costs and your wider tax position. Compare the company car route with personal ownership and mileage claims before deciding.

Plan it, Do it, Profit.

“A company car can save tax, but only when the numbers, the vehicle and the business use all make sense together.”

Further Support

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks, and welcome to episode 36 of I Hate Numbers. The mission of the show is to improve and strengthen your money mindset, help you make more profit in your business, save time, and allow you to enjoy the business that you have. This week's episode of I Hate Numbers is talking about company cars and tax, should you buy your car through your business.

In last week's episode, we talked about saving tax with company benefits. I'd suggest you check out last week's episode, talk about those lovely things of tax-free and trivial benefits. In this week's episode, we are going to focus on cars being one of those potential purchases. In this episode, I'm going to be looking at how the tax impact on company cars is felt, both for yourselves as an individual and for your business.

We're going to look at electric and hybrid cars. Are they a good thing? Should we consider buying them through our business, for our company? And we'll also look at options to buying a company car. Let's crack on with the broadcast. Firstly, let's clarify a couple of terms here. What do we actually mean by company car?

Well, we're talking about a car that your company, your limited company purchases for the use of yourself for personal use. So, even if you drive between home and work, that's considered personal use and, potentially, a benefit would arise. And secondly, by cars, we're specifically focusing on those vehicles that are designed to carry people as opposed to vans that are designed to carry goods and services.

The tax treatment of vans, we're going to deal with in a separate episode of I Hate Numbers. Now, the whole idea behind a company car is that your business, your company buys the vehicle, provides you for your use, and you use that car for personal reasons. And as I said earlier, even if you drive just between your home and your office, that's considered private usage and potentially a tax charge would arise.

There'll be tax payable by you as the individual user, and there'll be tax payable by your business, by your company, and that tax will be in the form of national insurance. When we work out the value of the benefits, there are three key numbers that we take into account. Number one is how is your car powered?

What's the power supply? Typically, is it petrol? Is it diesel? Is it electric, or is it a hybrid vehicle? The second number that we're interested in is what's the list price of that vehicle? Notice we're using the word list price, not what it actually costs you to go and buy it. And here's the third variable.

The third variable that we consider is what's the CO2 emissions of that particular car? Now, nobody can be expected to memorise the hundreds and hundreds of CO2-emission vehicles that are actually out there. So, lucky for us, we can find that information quite easily. So, the three key numbers that we need to get hold of - what's the power supply?

Is it petrol? Is it diesel? Is it hybrid or is it electric? What's the manufacturer's list price of that vehicle, and what's the CO2 emissions? Once we've got all those three key numbers, then we can actually piece the jigsaw together. The general calculation for working out the value of that benefit is to take the list price of the vehicle and multiply it by a particular percentage.

That particular percentage that we apply to the vehicle's list price is based on the CO2 emissions. As a heads up, the lower the CO2 emission, then the lower the percentage that we apply. The higher the CO2 emission, then the higher is the percentage. Let's start up with the idea of the list price. Now, the list price that we use includes any VAT that you pay over to the dealership, and it's based on the manufacturer's list price.

So, unfortunately, it's not what you manage to secure in a good deal. It's what the manufacturer's list price of that vehicle is. We take into account any personal contributions that you as the employee, you as the director, will make towards that vehicle, and we're allowed to deduct a maximum of 5,000 pounds.

So, that's step one. Determine what the manufacturer's list price is, and if any personal contributions are made by you as the director, employee, or by a member of your team, if you're providing them with a company car, then that gets taken into account. Later on in the podcast, I'm going to throw a few numbers into the mix so we can demonstrate why it may be worthwhile for you or your employees to actually make a contribution towards the purchase of that car.

The second thing we take into account is what's the CO2 emissions of the vehicle because the CO2 emissions determine what the relevant percentage is that we apply to the list price of the vehicle. In general terms, the lower the CO2 emissions of the car, then the lower the resulting tax charge will be.

We look at the situation as it exists for the tax year 2021. Well, a car that’s registered before 6th of April, 2020 with no CO2 emissions i.e. an electric vehicle will have no percentage applied i.e. no CO2 emissions, therefore, the relevant percentage will be zero. That's good news. What that means is if you buy an electric vehicle, then the value of that benefit for the year 2021 will be zero.

Good news indeed. If we consider a vehicle that's got CO2 emissions between 51 and 54 grams of CO2 per kilometer, then the percentage applied is 15%. And the extreme end of things, if your vehicle in question emits CO2 in excess of 170 grams per kilometer, then you've got a whopping 37% percentage to apply.

One more thing to consider is that if your car is diesel, diesels are considered very bad for the environment, very bad in terms of tax benefits as well. So, add a supplement of 4% to that percentage. However, the maximum you can apply is 37%. That’s what we've got at the moment. If you've got a vehicle, let's assume the list price of that vehicle was 20,000 pounds,

you look at the CO2 emissions and you read off that the actual relevant percentage is 25%, then the value of that car benefit is 25% times 20,000, which equals five grand. That's the figure on which you as an individual will pay tax and on which your company will pay employer’s national insurance accordingly.

What does that mean in pound note terms? Well, in pound note terms, it really depends whether you are what's called a basic-rate taxpayer, a higher-rate taxpayer, or an additional-rate taxpayer. Bear with me. So, if we've got a car that has a value of the benefit of, say, 5,000 pounds, if you are a 40% taxpayer, that's two-grand tax bill that you've got.

If you are the company, then you pay 13.8% on the value of that benefit, and that's your employee's national insurance. Now, the good news is though, if you do have a company car, that's your tax exposure, but the company can then deduct the cost of running that vehicle or the insurance, the car tax, the repairs on that vehicle,

and that could all be claimed as a company cost. So, that's got to be positive all way round. In their bid to encourage more and more people to drive electric or worse, hybrid vehicles, then the percentage will go down. And as we've said, if it's an electric vehicle, then you'll get a 0% for 2021. At most, based on current rates, that will go up to 2% in the next couple of years.

So, that's still going to be a worthwhile purchase to buy electric cars for your company and there are an incredible range of models now. There is an additional benefit as well. You will get a grant given to the dealership, the manufacturer, to help you reduce the cost of the purchase of that electric car.

The dealer does all the work and you can get a grant of up to 35% of the purchase price, maximum grant of 3,000 pounds. So, as you can see, there's a strong encouragement for people to go out and buy electric cars. Now, when we come to hybrid cars, hybrid cars also have a favorable tax regime. The percentage that we apply is really dependent on how far that car can travel on a single charge.

For example, if the electric range on that hybrid car is between 70 and 129 miles, then that's a 5% benefit charge that's applied to the list price of that vehicle. About hybrids - if your hybrid vehicle has an electric range of 130 miles plus, then the relevant percentage is 0%. So, we've talked about vehicles, we've worked out how they're taxed, so it's based on list price times a relevant percentage,

and that percentage is determined by how that vehicle is powered. Is it electric? Is it petrol? Or is it diesel? Or is it a hybrid vehicle? I said at the beginning of the broadcast that sometimes it may be that you wish or you make a contribution towards the purchase of that car. Now, there could be a number of reasons for this.

It could be that you decide to go through another vehicle which your employer can't afford, and you may be that employer if it's your company. The advantage of making a capital contribution is tax savings for both you and the company. Let's say for argument's sake, you as an individual, contribute five grand towards the purchase of that vehicle, and you happen to be a higher-rate taxpayer.

Now, if indeed your vehicle has a CO2 percentage of 30, then that means the tax that you save is 600 pounds per annum. The company will save 207 pounds per annum in terms of national insurance. So, making a five grand contribution towards the car is a tax saving of 600 quid a year, and a national insurance saving of 207.

It's getting a little bit strained with all these numbers flying about. Please do check out the show notes where I will provide some illustrations on the impact of the company car and tax regime. So, we talked about how the benefit is calculated. We talked about the impact on the employee and the employer.

We talked about capital contributions. We talked about electric cars, hybrid petrol, and diesel. An alternative may be not to bother buying the car and for you as the individual to purchase the car in your personal capacity. If you do that, then you have the option of charging your business, charging the company 45 pence per mile for each business mile that you travel.

Once you go over the 10,000 miles, then you can charge 25 p. That can be claimed tax-free. It counts as a deduction for the company, and therefore it may be worthwhile to consider that option as well. What I know is with around a million company-car drivers in the UK, electric vehicles are certainly taking traction.

They're certainly becoming more popular, and it becomes a much more affordable perk of your job. Check out the show notes at the end. If you want to have a look in a bit more detail, some of the numbers that are involved in the consideration of whether you should buy your car through your company.

That's all from me folks. Hope you got some value from the show. I'd love it if you could subscribe and spread the word. Feel free to subscribe so that you don't miss out on an episode. Until then, have a great week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value.

If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.