Company cars can seem like a good buy for your business but the individual is heavily taxed if they are available for personal use. You don’t even need to drive them, they just need to be available.
Company cars are not really tax efficient and we often advise clients to buy the car privately and just charge the company for mileage. For one client with expensive taste in cars we even recommended staying as a sole trader rather than a limited company. (I know your mate at the pub probably told you that you could save a shedload of tax by being a limited company but this isn’t always true! Ask us to do the detailed calculations for your chosen car)
This is because cars are treated as benefits in kind and taxed as if you have additional salary. The value of this benefit is based on a percentage of list price (including accessories) even if you buy them second hand. The employee pays tax and national insurance and the employer also pays national insurance.
The percentage used for electric vehicles is much lower than for others although this is increasing each year.
As well as the vehicle any fuel for personal use is taxed at a flat rate for the year so work out how much you use to see if it is tax efficient.
If you’re still considering a company car then you may be able to reduce your overall tax burden by many different means:
- If you lease a car (operating lease, not a finance lease) you may be able to reclaim half the VAT on the lease payments
- Consider electric vehicles or at least lower emission cars
- Consider a van if that would be suitable for your work as this is taxed differently
- If you don’t use the car personally then make sure that it is not insured for personal use and is not kept at your home overnight (difficult if you work from home)
- If you have a taste for expensive cars it may even be worth you running your business as a sole trader or partnership rather than a limited company