Company Car or Private Vehicle - Which is Best?

company-car-tax

I get asked this question a lot because the rules and taxes relating to company cars are quite complex. If you’re considering getting a new car and wondering whether to put it through the company or not hopefully this article will help you decide.

The two options we are going to consider are based on leasing a car either through your company or leasing it privately and charging your company mileage.

Private Leasing

We’ll deal with this first as it’s the easiest to cover. If you privately lease the car (have it in your own name) then you pay for the lease costs, insurance, maintenance and fuel from your pocket and recharge the company mileage at 45p per mile for the first 10,000 miles and 25p thereafter.

There is no tax to pay on the reimbursement of business mileage so if you do 10,000 business miles in a year you’ll be able to claim £4,500 tax free from your company.

Company Car

If you lease the car through your company it becomes a Benefit in Kind (BIK) and you will pay income tax on the benefit and your company will pay employers national insurance contributions.

On the plus side all the lease payments, insurance and maintenance can be charged directly to the company and are tax deductible for corporation tax. You can also put through fuel costs but be very careful to only charge your company for the proportion or fuel used in business as paying for Private fuel costs has its own very costly tax charge.

Which is better Private or Company?

To understand this, we will need to do some calculations and make some assumptions in each case.

Let’s assume we are leasing a new BMW 520 MSPORT for £400 per month (£4800 per year) including maintenance but insurance will cost a further £500 per year.

Total running costs £5300 per year. (business fuel will be paid for from the company with no tax implications)

Assuming you are a higher rate tax payer then to pay £5300 personally you would need to earn £8833 and pay £3533 in tax!

If we get the company to pay the £5300 then the company car has a benefit in kind tax charge based on its value, fuel type and its Co2 emissions.

In this example the BMW 520D MSPORT has a BIK value of £39,620, a co2 of 114 and is diesel so has a benefit charge of 24%.

The calculated benefit in kind (BIK) is therefore £39620 x 24% = £9508.80 on which a higher rate tax payer would pay 40%.

Company Car Tax in this example is £9508.80 x 40% = £3803.52.

In this example we are £270.52 worse off if the car is a company car but if you own the company its even worse as there is still the Employers National Insurance Contribution to pay.

Employers NI is charged at 13.8% on the BIK value of £9508.80 which in this case is £1312.21 more to pay each year!

You would be able to claim 50% of the VAT back from your lease payments which in this case would be £400 but that only reduces the cost of the lease for your company and doesn’t really affect the tax calculation.

Other considerations

No one example can be used to calculate which route is best and therefore you should use the HMRC tools to calculate the cost or benefit for each car. (links below)

The tax rate charged on BIK values is going to increase so the charge on our example BMW for 2017/18 will rise to 26% next year and 29% in 2019/20.

Deposits and initial rental values can have a major impact on these calculations as they can be considerable amounts of money and you must then consider if leasing privately how much tax you will pay on the deposit amount as well as the rental because for a company vehicle the initial lease deposit is tax deductible and you can claim 50% of any VAT back.

Helpful links

HMRC Company Car Tax Calculator

Company Car tax BIK rates (PDF Download)

5 Options to Reduce Inheritance Tax
Tax Efficient Investments VCT, EIS and SEIS
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