Company Car Tax Implications for Businesses

For many business owners, purchasing a company car through their limited company can seem like a tax-efficient way to acquire a vehicle. However, it's important to understand the tax implications for both corporation tax and benefit in kind (BIK) charges before making a decision.

Corporation Tax Relief

When a company purchases a car, it may qualify for capital allowances, which reduce the taxable profit and therefore lower corporation tax liability. The amount of relief depends on the car’s CO2 emissions:

• 100% First-Year Allowance (FYA) – Available for brand-new, fully electric cars with zero emissions. This means the full cost of the car can be deducted from profits in the first year. (HMRC Guidance)

• Main Rate Writing Down Allowance (18%) – Available for cars with CO2 emissions of up to 50g/km.

• Special Rate Writing Down Allowance (6%) – Applies to cars with CO2 emissions above 50g/km.

  
  

It’s important to note that leased cars do not qualify for capital allowances. Instead, the lease payments can typically be deducted as an expense, though restrictions may apply if emissions exceed 50g/km.

VAT Considerations

If the company is VAT-registered, it can reclaim VAT on the purchase of a company car only if the car is used exclusively for business purposes. Given that most company cars have some private use, VAT recovery is usually restricted. (HMRC VAT Guidance)

For leased vehicles, VAT recovery is generally limited to 50% of the VAT on lease payments if there is private use.

Benefit in Kind (BIK) Tax for Employees and Directors

A major consideration when purchasing a company car is the Benefit in Kind (BIK) charge. If a company car is available for personal use (including commuting), it is treated as a taxable benefit for the employee or director.

BIK tax is calculated based on:

• The car’s list price (P11D value, including VAT and delivery charges but excluding road tax and registration fees).

• The car’s CO2 emissions and fuel type – the percentage rate applied to the P11D value increases with emissions.

• The individual’s income tax band (20%, 40%, or 45%).

For example, an electric car with 0g/km CO2 emissions currently has a low BIK rate (e.g., 2% in 2024/25), making it a tax-efficient choice. In contrast, a petrol or diesel car with high emissions could attract a BIK rate of 37%. (HMRC BIK Rates)

The employer must also pay Class 1A National Insurance (NI) contributions (currently 13.8%) on the BIK value.

Fuel Benefit Charge

If the company also pays for fuel used privately, an additional BIK tax is applied based on a fixed multiplier (£27,800 for 2024/25), multiplied by the car’s BIK percentage. (HMRC Fuel Benefit Rules)

Should You Buy a Company Car?

Before purchasing a company car, consider the following:

• If a car is needed mainly for business use, an electric vehicle may be the most tax-efficient option.

• If private use is significant, personal ownership with mileage reimbursements might be preferable to avoid high BIK charges.

• Leasing may be a better option if VAT recovery and tax efficiency are priorities.

  
  

Conclusion

Buying a company car can be beneficial for tax purposes, particularly if it’s a low-emission or electric vehicle. However, the BIK tax and NI contributions must be factored into the decision. Consulting with an accountant can help determine the most cost-effective approach for your specific circumstances.

If you're considering purchasing a company car and need expert advice, feel free to get in touch!