An ever changing tax landscape means buying a company car could be one of the least tax efficient methods of ownership

When considering the purchase of a company car, whether as a company director or part of an employee benefits package, it’s essential to look beyond the purchase price. Ownership structure, tax treatment, funding method, and long-term strategic goals all play a part in determining whether the car represents a sound financial decision.

A company vehicle can be a valuable tool, both as a reward mechanism and a tax-efficient investment, but the way a company car is acquired and used can have significant implications for the tax position, cash flow, and financial statements of a business.

Buying a company car can offer several advantages when it comes to tax savings. Deducting car-related expenses, like maintenance and insurance, from business profits reduces corporation tax liability. Additionally, depending on the vehicle and its usage, businesses can claim capital allowances on the purchase price and potentially reclaim VAT.

Bear in mind, however, that insurance premiums for company cars can also be higher than for personal vehicles so this needs to be taken into consideration along with any maintenance, repairs and service costs.

When thinking about the purchase, it is important to consider whether the company car will be used for personal journeys as this will incur a benefit in kind tax liability. Cars also depreciate in value so if a company decides to sell it this will significantly impact the resale value and reduce the long-term financial return.

 Purchasing

How the car is purchased needs to be carefully considered as buying a company car upfront requires a substantial amount of capital outlay which also directly impacts cashflow.

The choice between leasing and hire purchase depends on company profitability, balance sheet objectives, and tax planning goals.

With lease hire, monthly lease payments are deductible in the period incurred, reducing accounting profits. The vehicle also does not appear on the balance sheet for now, although this is set to change when the lease accounting rules under FRS 102 UK GAAP change next year, bringing leases on the balance sheet.

However, lease payments provide steady tax relief and lower upfront costs, making it suitable for businesses with fluctuating profits or limited cash flow.

If purchasing through hire purchase, the full purchase price qualifies for tax relief in the year it was bought and the vehicle appears as an asset on the balance sheet. This can be beneficial in high-profit years and for companies seeking to enhance asset value ahead of external investment or sale.

But if this isn’t the case, the upfront tax relief may offer limited advantage, and the associated debt on the balance sheet could negatively impact financial ratios or borrowing capacity.

 

Example: Limited company

 

• Taxable profit before capital allowances for the car: £75,000
• Corporation tax payable: £16,125 (effective marginal rate of 21.5%)

• Car purchase price: £30,000
• Taxable profit after capital allowances for car: £45,000
• Corporation tax payable: £8,550 (at a rate of 19% as below £50,000 threshold
• Corporation tax saving of £7,575

 

Electric vehicles

 

Electric company vehicles come with their own set of rules. Limited companies can claim a 100% first year allowance on the purchase of new, fully electric vehicles. This means the full cost of the vehicle can be deducted from taxable profits in the year of acquisition, subject to sufficient profits.

 

Tax incentives for electric vehicles are also favourable at the moment, but we don’t yet know what this looks like for the future. For directors considering the transition to electric, purchasing through the company, particularly under hire purchase can deliver material tax savings.

 

Charging infrastructure also comes with benefits: businesses can claim 100% of the installation cost of workplace EV charge points through capital allowances. Grants are also available for installing chargers at home, depending on eligibility.

 

Using personal vehicles

 

It’s important to look at the difference between having a company car versus using personal vehicles.

 

Using a personal car for business purposes can offer several advantages, particularly for directors and employees who do not require a vehicle full-time.

 

Rather than committing to the costs and tax implications of a company car, individuals can instead claim mileage allowance relief for business journeys, currently 45p per mile for the first 10,000 miles, then 25p thereafter.

 

This approach can be more tax-efficient, especially for lower-emission vehicles and gives the individual full control over the choice, financing, and use of the vehicle, without the complications of company ownership or restrictions on private use.

 

Benefits in kind

When a company car is made available for an employee or director’s personal use, it is treated as a benefit in kind (BIK) and taxed accordingly.

The taxable value is based on the car’s list price, its CO2 emissions, and fuel type. Higher-emission vehicles attract higher BIK rates, sometimes over 30%, including hybrid cars, while electric cars are currently taxed at a much lower rate of 3%, making them far more tax-efficient, but this rate will continue to increase annually until at least 2029-30.

Employees must pay income tax on the BIK value, and employers also pay Class 1A National Insurance. If private fuel is provided, this is taxed separately and can significantly increase the total tax liability, often outweighing the benefit.

As a result, many businesses and employees are now opting for low-emission or electric vehicles, particularly via salary sacrifice schemes, which offer considerable savings for both parties.

When deciding whether to purchase a company car or not, evaluate the pros and cons of doing so. The usage and benefits will be different for every company, and you need to weigh up what works best.

Before purchasing a vehicle outright, look at the benefits of leasing or hire purchase and the level of risk you are prepared to take on. Ensure you have a clear understanding of your profit, cash flow, and business plans to work out what is right.

When it comes to company cars, the most efficient solution depends on the business’s circumstances, profitability, employee structure, vehicle usage, and future strategy. Directors should work closely with their accountant to assess not only the tax reliefs, but also the full financial impact.