Limited company cars provided to directors and tax issues

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

22nd June 2020

company car rules for directors - is it worth having a company car?

This article is relevant to the tax year 2022/23

It’s to focus on whether or not limited company directors should purchase a car through their own limited company or in their own personal name. A company car for directors can provide some benefits. Company cars for directors can also have some tax disadvantages you need to mitigate.

The company car rules for directors is a complex area of UK taxation, and business owners and directors need to study it carefully

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Tax considerations of having a company car for business owners

Business owners and directors need to consider the tax issues surrounding a car purchase through a limited company. There are several tax dis-benefits:

Directors need to answer the critical question of “is it worth having a company car?”

– Income tax for the employee for the car

– Income tax for the employee for the fuel paid for by the limited company

– The limited company charges national insurance for providing you, the director/employee, the company car

We also need to consider several tax benefits when deciding whether or not to buy a car within your own limited company.

– Capital Allowances claim to reduce corporation tax for business owners

There was just one tax benefit, after all. This is why it is vital for business owners and directors to understand the company car tax rules.

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Example of the benefits in kind charge - company car for directors

Sarah’s own limited company provides her with a Diesel BMW 218i M Sport Coupe. The car has a car list price of £30,000 and a Co2 emissions value of 170g/km. From a cash flow perspective, it is worth working out the difference between buying the car outright and paying a money lease payment.

She, as a company director, knows she will do 8,000 business miles per year. She may spend a further £4,000 per annum on the road tax and fuel.

From the HMRCs car benefit online calculator, we can see that:

Basic rate taxpayer High rate taxpayer
Car benefit charge (List price) (2021/2022) £11,100 £11,100
Company Car Tax (2021/2022) £2,220.00 £4,440.00
Company Car Fuel Tax (2021/2022) £1,820.40 £3,640.80
Total tax charge (2021/22) for the individual £4,040.40 £8,080,80
Employer national insurance charge of providing the above (based on the car benefit and fuel benefit) £11,100 X 13.8% £1,531.80 £1,531.80
Total tax paid by Sarah (given she owns the company) £5,572.20 £9,612.60
     
Less: corporation tax  saving on the actual fuel and road tax costs £4,000 (£760) (£760)
Less corporation tax saving of the employers 13.8% NIC charge (£1,531.80 X 13.8%) (£291) (£291)
Net ongoing tax for having the car £4,522.20 £8,562.60

As a limited company owner, Sarah will pay a total tax liability of £4,522.20 as a basic rate taxpayer and £8,562.60 as a high rate taxpayer by having a company car.

Putting this into perspective, the tax paid as a high rate taxpayer is 28.5% (£8,562.60 divided by £30,000). This is a lot of tax to pay.

In addition to this, she will be required to complete a benefit in kind P11D form to notify HMRC that her limited company has provided her with a company car. A P11D form needs to be submitted to HMRC no later than 22nd July each year.

Company cars for directors may mean that directors have higher tax rates to pay than they did without a company car. That is because they will have a benefit in kind charge

So, is it worth having a company car for you?

You also need to consider the below costs to say who will pay for them and if there is an equal benefit in kind tax charge for them

– Car itself (answered above)

– Care maintenance

– Car insurance

– Care repairs

– Car fuel (answered above)

All of the above costs need to be taken into consideration for the UK limited company as it will get a corporation tax relief and for the individual who may pay greater BIK rates of tax.

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Is it better for directors charge the company a mileage rate rather than to have a company car?

Vehicle leasing can mean different things, significantly impacting the tax reliefs available.

Leasing a company car is essentially ‘renting’ it intending to hand it back in the future. This is classified as an operating lease. An operating lease is often the “go-to” for many company directors and business owners.

This is different to a Personal Contract Purchase (PCP).

If the car has emissions under 110g/km, directors can get tax relief on all payments.

From April 2021, this threshold went down to 50g/km. Only cars with CO2 below this get full relief on monthly rental payments.

Let us continue with the example of Sarah, the company director, who uses the Diesel BMW 218i M Sport Coupe to do 8,000 business miles.

Let us not forget that she could lease the same car for circa £300, but rates will vary from company to company and car to car. Select Car leasing may be able to provide a discount on your desired car.

The cost of leasing the car per annum would be £3,600. She may spend a further £4,000 per annum on the road tax and fuel. This is a total cost of £7,600.  Sarah could get tax-free money out of the company amounting to £3,600 (8,000 miles at the HMRC approved rate of 45p per mile for the first 10,000 miles and then 25p thereafter).

The net cost of having the car in her own name would be as follows

£3,600 for the car lease in her own name

£4,000 cost of mileage and road tax

£7,600

(£3,600) mileage costs she charges the limited company

£4,000

Sarah’s own limited company would also benefit from a 19% corporation tax saving against Sarah’s mileage claim of £3,600 (£8,000 X 19%)

This is significantly cheaper than the total tax of having the car in the company of £9,484. Let us not forget that the company still needs to pay for the car.

How much tax will you pay by having a company car? Will you now pay higher tax rates by having a company car as a UK limited company director?

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No benefit in kind charges for having an electric company car for directors

From 6th April 2020, the BiK brackets were substantially revised, with the taxable figure for a zero-emissions electric vehicle dropping from 16% to 0%.

The taxable figure rises marginally from 1% in 2021 and 2% in 2022, while the Budget confirmed that the 2% rate would be maintained through to the 2024/25 tax year.

The Government sets BiK tax rates to encourage employers and company car drivers to choose vehicles with lower CO2 emissions like pure electric cars or plug-in hybrid company cars for directors.

The Benefit in Kind tax band change was also changed retrospectively, meaning that company car drivers who took delivery of a fully electric company car before 6th April 2020 also benefit from the 0% change.

If you, as a company director, would like to save tax on the BiK of your company car, please get in touch with one of our tax team.

Capital allowances to reduce corporation tax by having a limited company car

A further tax break on electric cars is that you can claim capital allowances for your business when directors buy used vehicles.

This enables you to offset the cost of an electric car purchased for your business from your profits before you pay tax.

For expenditure incurred before 1st April 2021, a 100% First Year Allowance (FYA) was available for a new electric car.

The government announced in the 2020 Budget that for expenditure incurred on or after 1st April 2021, the FYA will be restricted to new electrically propelled and zero-emission cars.

HMRC has provided clear information on claiming capital allowances on company cars to review.

Our specialist tax team can advise you on how to claim capital allowances on your electric car today.

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We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

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Electric V Petrol V Diesel cars and tax benefits

Looking at the above, it makes more sense for people who run petrol or diesel cars to own them in their names. They would then claim a mileage rate against their own limited company. The tax charges for having your own limited company to provide a car could cost you more in tax than the car itself.

However, there is no employee tax benefit in kind charges for having an electric car provided to directors. No employer’s national insurance contributions charge for providing an employee with an electric company car. To boot (pardon the pun), the limited company would benefit from a first-year allowance capital allowances claim.

A £100,000 electric car in a company would provide a £19,000 corporation tax saving with no employer or employee tax benefit charges.

Company cars for directors may not just give the individual a benefit, but there may be one for the limited company too.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

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Purchasing a van through a limited company

Vans are classified as ‘Plant and Machinery’ for tax purposes. They qualify for 100% allowances under the Annual Investment Allowance regime. This means you get a deduction for 100% of the cost to reduce your company’s taxable profits as a director/shareholder.

Where there is an “insignificant” level of private use, HMRC acknowledges that there is no benefit arising, and these amounts do not apply.

Insignificant private use would be classed as, for example, visiting the dentist on the way home from an assignment. Using a van for weekly shopping would not qualify as insignificant private use. If there is an insignificant level of private use, there are substantial tax benefits in utilising a company van compared to a vehicle with high CO2 emissions.

Just because a vehicle “looks” like a “light commercial vehicle/van” does not mean HMRC treat it as such for tax purposes.  Here is a list of vehicles HMRC has confirmed will fall under van/LCV tax treatment rather than a car.  This list is not exhaustive, and if you are, for example, looking at a double row of seat “pickup”, then there are additional criteria to consider and review to determine how HMRC will view it… (including the fact it cannot weigh more than 3.5tonnes, must be able to carry a payload of at least 1 tonne etc.)

A van may be a more suitable solution than a company car for directors.

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Benefit in kind charges of having a van as a company director

The use of a van would still be part of your P11D and need to be submitted to HMRC by 6th July each year as part of your payroll process. Any employer’s NIC payments need to be made by 22nd July

– Employer PAYE reference
– Your employee ID
– Description (make, model, CO2 emission, diesel or petrol)
– Dates the vehicle was made available from
– Dates the fuel was fully paid for by the company

The process will involve:

– Complete and post to HMRC the paper form P11D Working Sheet 3
– Fill in and post to HMRC the paper form P11D
– Complete the online P11D (B) form and send it to HMRC

Forms will be sent to:

P11D Support Team
BP1102
HM Revenue and Customs
Department 1250
Newcastle-upon-Tyne
NE98 1ZZ

Business owners and company directors need to work with your tax advisor and explore the question, “is it worth having a company car at all, given the tax issues?”.

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Should I opt for Salary Sacrifice with an electric car as a company director?

Salary sacrifice enables directors to exchange part of their salary for a non-cash benefit from their business, such as a company car.  This is another example of where both your company and directors can benefit from the tax breaks on electric cars

Salary Sacrifice on fully electric vehicles is a cost-effective way of driving.

Once enlisted on a scheme with a suitable electric car, a single monthly payment covering leasing, maintenance and insurance is taken directly from an employee’s salary before income tax and National Insurance (NI) contributions.

This means that both the employee and employer save money, as the employee pays tax on a lesser portion of their salary. In contrast, the company pays fewer NI contributions while helping to support more zero-emissions driving.

Salary Sacrifice can be utilised regardless of an individual’s role or the size of a business.

To discuss how Salary Sacrifice can help you save tax, contact our tax team today.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

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Can I reclaim VAT on an electric car?

An electric car will still be viewed as a car for VAT purposes.

If there is any private car use, VAT is not recoverable on purchase.

The VAT can be reclaimed if the electric car is used 100% for business purposes, although this can be difficult to prove to HMRC.

A similar restriction also applies to leased company cars.

Where there is any private car use, only 50% of the VAT on the leasing charge can be claimed.

Full VAT recovery is available on ongoing maintenance of leased cars, subject to partial exemption and business use tests.

Vans and motorbikes are not classified as cars, so input VAT is claimable.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

Related Articles

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord. You may also be interested in reasons why people should and should not use a limited company to buy a property.

There are many ways in which you can pull tax free money out of a limited company.

Someone that is employed may be asked whether or not they want a company car or an additional amount of salary.

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