Buying a car through a business might be one of the most expensive purchases you make. There are also plenty of considerations including the big one; the tax implications, so you need to be armed with the facts before making such a monumental decision.
Other common questions that business owners ask will be how you buy a car through a limited company, a business, or as a sole trader. Not just that, but also whether it’s worth it, and can you buy a car outright as a business expense, or even write it off against tax?
In more recent years, buying an electric car through a limited company has also become a hot topic, as well as the implications for buying a second-hand vehicle.
It’s likely you can get a car on your business, but not before careful consideration of the facts. In this guide, we will explain all you need to know about buying a car via your business, and how you can do it the best way.
Buying a car through a business: why and how you can do it
We get it.
You work just as hard as other small business owners out there and you see them driving around in these nice new cars. Why can’t I have that, you might ask?
Can I buy a car through my business? Yes, you can buy a car on your business. The business will be able to claim capital allowances and associated costs of running the car can also be offset against profit reducing the business’s overall tax liability. But many variables make this a complex area.
Throughout this guide, we will walk you through the practical, financial and tax considerations of buying a car for your business in the UK.
You can then make an informed decision about whether it’s worth buying a car through your company.
Can I get a car on my business – the main considerations
There are various considerations when contemplating buying a car for business. Some of the key items to think about:
- Will I lose my insurance “no claims” bonus?
- How much personal tax will I pay (and can you avoid it)?
- Is it better to buy a business car or lease a business car?
- Who handles the running costs of a business car?
- Is it better to claim mileage or fuel?
- Would it be better to get a car allowance?
This is not an exhaustive list, but you get the idea. There is so much more to buying a car through a limited company business or as a sole trader than simply deciding on the make, model, and colour.
Oh, don’t forget the full-body vinyl wrap with the company logo and branding!
A major factor will also be which type of business you run. The rules and tax consequences will be different whether your business runs as a sole trader or a limited company. Both scenarios are below to help you make an informed choice.
Before doing that, we will look at items that are not affected by the business structure.
Handy Hint: Did you know that employers don’t actually have to pay 45p per mile in fuel expenses?
Claim capital allowances
You can claim capital allowances on cars you buy and use in your business. This means you can deduct part of the value from your profits before you pay tax.
Use writing down allowances to work out what you can claim – cars do not qualify for annual investment allowance.
For capital allowances a car is a type of vehicle that:
- Is suitable for private use – this includes motorhomes.
- Most people use privately.
- Was not built for transporting goods.
Because they do not count as cars you can claim annual investment allowance on:
- Motorcycles – apart from those bought before 6 April 2009.
- Lorries, vans, and trucks.
You can claim one of the following:
- The full value of the car as first year allowances.
- 18% of the car’s value (main rate allowances).
- 6% of the car’s value (special rate allowances).
Cars bought from April 2021
| Description of car | What you can claim |
| New and unused, CO2 emissions are 0g/km (or car is electric) | First year allowances |
| New and unused, CO2 emissions are 50g/km or less (or car is electric) | Main rate allowances |
| Second hand, CO2 emissions are 50g/km or less (or car is electric) | Main rate allowances |
| New or second hand, CO2 emissions are over 50g/km | Special rate allowances |
The CO2 emission level of the car will decide the capital allowances available and the speed with which relief for the expenditure is given.
If you are considering buying a car through your business account, this needs to be a major factor in the choice made to maximise those tax savings.
Buying a car for business as a sole trader
Can I buy a car through my business as a sole trader? Yes, you can buy a car through your business as a sole trader, and it could be tax efficient. The HMRC may ask you to provide evidence the vehicle is used for work purposes. How you get tax relief will depend on how you buy the car and its CO2 emissions.
Buying a car for business if you are a sole trader in the UK is different to buying a car through a limited company. When you run your business as a sole trader you are the business whereas a limited company is a separate legal entity to the business owners.
As a result, the tax treatment when buying a car through a business account is applied differently.
If you’re a sole trader or a partner, you can claim simplified mileage expenses on business vehicles – if you have not already claimed for them in another way.
Check if simplified mileage expenses would be more beneficial before deciding about buying a car for your business. You can use the free HMRC (HM Revenue and Customs) simplified expenses checker to find out which method is best for you.
Be aware that you cannot change the method used for a vehicle once you have started. You must keep the same method for the entirety of the time you have that car in the business.
Capital allowances for cars through a sole trader business
If you’re a sole trader or partner and you also use your car outside your business, work out what you can claim based on the amount of business use.
Should I buy a car through my limited company?
As we have found above with the introduction of the principle of capital allowances there are tax benefits to buying a car through your limited company that would not be achieved if you bought the car personally.
On top of this, the associated costs of running the car will be tax deductible so each pound you spend on servicing, repairs, insurance, fuel etc will reduce your corporation tax liability by the applicable rate of corporation tax which is presently 19% (2022).
Capital allowances when buying a car through a limited company
If your business supplies a car for an employee or director, you can claim capital allowances on the full cost. You may need to tell HMRC the car is a company benefit if they use it personally.
So far, so good, surely everyone should start considering buying a car through their limited company?
Not so far… as if it would be that cost-effective. As you can imagine, there are some disadvantages to buying a car on your business.
Benefit in kind on company car
You’ll pay tax if you or your family use a company car privately, including for commuting.
You pay tax on the value to you of the company car, which depends on things like how much it would cost to buy and the type of fuel it uses.
This value of the car is reduced if:
- You have it part-time.
- You pay something towards its cost.
- It has low CO2 emissions.
If your employer pays for fuel you use for personal journeys, you’ll pay tax on this separately.
If your company car has CO2 emissions of 1 to 50g/km, the value of the car is based on its zero-emission mileage figure, or ‘electric range’. This is the distance the car can go on electric power before its batteries need recharging.
You can see how much tax you might pay with HMRC’s company car and fuel benefit calculator.
How do I buy a car through my limited company?
Now you have established whether you should buy a car through the limited company you need to think about how you are going to pay for it.
The way in which you fund the purchase of the car through your business makes no difference to the benefit the individual driving it receives so will not change their personal tax situation.
The way you buy a car through a limited company does affect cash, accounting, and tax treatment. Look at the following common options and the potential outcomes of each to see what works best for your business situation.
1. Buy a car outright
Your business can buy a car outright through a limited company. When doing so, the following transactions will be recorded in your accounting records. For this example, we are buying a car through our business for £20,000.
- Assets increased by £20,000.
- Cash decreases by £20,000.
Each year a charge called depreciation is applied to the profit and loss account to allow for the fact the car will go down in value. We assume the car is written off over a four-year period.
- Depreciation increases by £5,000.
- Asset decreases by £5,000.
Your balance sheet shows the financial position of your business has decreased by £5,000 being the decrease in the value of the car.
Your profit and loss account showing the performance of your business decreases by £5,000 being the depreciation charge for the decrease in the value of the car.
This will happen each financial year until the value of the car on your balance sheet is zero.
When buying a car outright through a limited company capital allowances are calculated and reduce your corporation tax liability.
Buying a car through your business when a limited company by using cash in the business account is a practical option if you have the funds available and do not require it for other items. The company owns the car, and it is an asset of the business which could be sold if needed.
2. Get a car on hire purchase
The car will be displayed on the Balance Sheet of the business as an asset. Any finance that is still outstanding on the car will be shown as a liability in the Balance Sheet which reduces with each payment made.
Each payment made to the Hire Purchase company will have an interest charge which is a cost to the business recorded in the profit and loss. This is tax deductible.
For the most part, the rest of the transactions will be in line with if you bought the car outright.
3. Lease a car for your business
In this scenario you do not own the vehicle, so it is not recorded in the Balance Sheet of the business as an asset. A note will be entered into your statutory accounts to provide for the fact the business has a commitment to pay for the car over the rest of the contract term.
The cost of the car is expenses to the profit and loss account. This cost is tax-deductible.
Can a company buy a second-hand car?
Yes, a company can buy a second-hand car as there are no pre-requisites that a business must buy a new car. Therefore, you are perfectly within the HMRC rules for a company to buy a second-hand car.
But before you rush off to your local second-hand car dealer please read our list of a few items below to aid your decision-making process.
1. CO2 emissions when buying a second-hand car through a company
The HMRC benefit in kind calculations uses the CO2 emissions in the formula for working out how much it costs an employee to have the company car. Newer cars have lower CO2 emissions as the government has made dirty cars less desirable as they try to meet their carbon emissions targets.
Buying a second-hand car to save money might end up costing more eventually.
2. Running costs when buying a second-hand car through a company
Now we have proven that a company can buy a second-hand car we need to discuss the practicalities of owning a second-hand or older vehicle. The running costs of that car are likely to be higher than a new car. It will not be as economical on fuel which now is very topical with record-high fuel prices.
If the car is going to do a lot of miles, it needs to be reliable.
3. Capital allowances when buying a second-hand car through a company
Second-hand company cars bought from April 2021 with CO2 emissions of 50g/km or less (or car is electric), can claim main rate allowances, which is currently 18% of the car’s value (2022).
Second-hand cars bought from April 2021 with CO2 emissions over 50g/km, can claim special rate allowances, which is currently 6% of the car’s value (2022).
FAQs on buying a car through a business
Is it worth buying a car through my company?
This is the million-dollar question, and the answer honestly is; it depends. This won’t be the answer you were probably looking for but unfortunately, it depends on several variables and relates to both your personal and business situation.
The outcome can be completely different for two people even if they were buying the exact same car for business purposes.
As we have shown in this article there are several things to consider. Our recommendation would be to speak with your accountant or bookkeeper and work through various scenarios.
Something as simple as switching one car for another in your calculations could change your mind. The CO2 emissions of the vehicle are one of the key drivers of the overall costs to you when factoring in the benefit in kind.
It is not enough to simply consider the tax savings for the business of buying a car through the company but to combine the overall result with the tax that will be paid personally and the national insurance charge the business will pay for providing you with a company car.
Something else to consider is the number of business miles you will be completing. Would you be better off paying for your own fuel and avoiding the benefit in kind charge for fuel?
How to buy a car through your business
Your business can provide you with a company car. In paying for the car and associated costs such as fuel, insurance, repairs and servicing the business is providing you with a benefit in kind as you do not have to pay for these costs yourself.
And here’s how you do it…
The business will need to complete a P11D to report the benefit in kind to HMRC and to pay employers National Insurance on the benefit in kind.
Once the form has been processed, HMRC will adjust your tax code so that the tax can be collected through the payroll. You will also need the P11D details for the completion of your Self-Assessment return.
The benefit in kind is calculated based on the type of car you have. This can make a significant difference in your decision-making process.
Before making any commitments use the HMRC company car and car fuel benefit calculator to calculate your potential liability. It might help you make the right decision.
Can a business buy a car outright?
Yes. The business can buy a car outright. There is no distinction in the rules about how the financing of buying a car must work. The accounting and tax treatment may vary when buying a car outright versus Hire Purchase.
The cash flow for the business will also change depending on whether the business buys a car rather than using Hire Purchase.
Can I buy any vehicle on my business?
Yes, you can buy several types of vehicles through your business. You could buy a car, motorcycle, van, truck, and lorries. But the tax rates and reliefs for each can differ so make sure you understand the rules before making a commitment to buy.
Handy Hint: If you are a sole trader, learn how you can buy a van for your business and the VAT implications.
Where a specific chapter of the benefits code does not apply the vehicle with be treated as ‘all other assets’. Cars and vans have their own benefits code.
The term asset is a general term used for things like a motorcycle, laptop, clothing, fridge, quad bike, yacht, plane, land, cars, and house.
For ‘all other assets’ the taxable benefit in king is 20 per cent of the market value at the time it was first used as a benefit.
For example, the benefit-in-kind value of a motorcycle is calculated as 20% of the total cost (including VAT) of the motorcycle.
Can I claim a car as a business expense?
Yes, you can claim a car as a business expense. If you have hired a car for business purposes or you are leasing a car, then this is a legitimate business expense.
Can you give a company car to your husband or wife?
Yes, you can give a company car to your wife, but as with all things related to tax, there will be some implications to consider. Read those here before you make a purchase.
Handy Hint: Make sure that your company car policy states whether or not partners can drive company cars so insurance mistakes are not made.
Conclusion
The decision of whether to buy a car through your business is a difficult one. There are several variables to consider such as how to pay for it, what capital allowances can be claimed, what the overall cost will be, whether you should pay for your own fuel etc.
It really is one of the most complex area for small business accounting, not to mention one of the most popular questions asked of accountants.
If you are buying a car in your business for employees, you may also wish to factor in the employee’s individual circumstances as that could also change the decision-making process. The same car could have two completely different outcomes.
Seek professional advice where possible. It can be easy to make the wrong decision which could cost you time and money.
A simple change of car or a subtle change to the way it is structured could make all the difference. Your bookkeeper and accountant should be well versed in this.
You might also like…
- Can a limited company lend money to a private individual?
- The best way to put money into a limited company
- Can a director have two company cars
Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
