The Tax Implications of Buying a Company Car

One of the most common question from my clients is "what are the tax implications if I buy a car from my company." So, here is a detailed explanation which could help you in your decision-making process.

Purchasing a company car in the UK can significantly impact both business finances and employee tax liabilities. Here’s an updated overview of the key tax considerations for the 2024/25 tax year.

1. Corporation Tax Relief

When a business purchases a company car, it can claim capital allowances to reduce its taxable profits. The rates for these allowances depend on the car’s CO2 emissions:

• 0 g/km CO2 emissions (electric cars): Businesses can claim 100% first-year allowances. This means the full cost of the car can be deducted from profits before tax.
• Up to 50 g/km CO2 emissions: These cars qualify for first-year allowances until April 2025.
• 51 to 110 g/km CO2 emissions: These vehicles qualify for the main rate of 18% writing down allowances.
• Over 110 g/km CO2 emissions: These qualify for the special rate of 6% writing down allowances.

2. VAT Implications

The ability to reclaim VAT on a company car purchase depends on its usage:

• Fully for Business Use: If a car is used exclusively for business purposes, the company can reclaim the full amount of VAT.
• Mixed Use (Business and Private): If a car is used for both business and private purposes, the VAT cannot be reclaimed. However, VAT on maintenance and fuel can still be reclaimed proportionately to the business use

3. Benefit-in-Kind (BIK) Tax for Employees

If an employee is provided with a company car for personal use, it constitutes a taxable benefit. The tax payable is based on the car’s P11D value (its list price including VAT and accessories), its CO2 emissions, and the employee’s income tax rate. The lower the emissions, the lower the BIK rate:

• Electric Vehicles: For the tax year 2024/25, the BIK rate remains at 2%.
• Low Emission Vehicles (1-50 g/km CO2): The BIK rate varies between 2% to 14%, depending on the car’s electric range.
• Higher Emission Vehicles: Cars with emissions above 50 g/km have progressively higher BIK rates, up to 37%

4. Class 1A National Insurance Contributions (NICs)

Employers must pay Class 1A NICs on the value of the BIK provided to employees. This is calculated at a rate of 13.8% of the taxable benefit value. Providing low-emission vehicles can result in significant NIC savings for employers

5. Fuel Benefit Charge

If the company also pays for fuel used privately by the employee, this is another taxable benefit. For the 2024/25 tax year, the fuel benefit charge is based on a fixed value (￡27,800), multiplied by the car’s BIK rate. This can add a substantial amount to the employee’s tax bill

6. Electric and Hybrid Vehicles

The government continues to incentivize the use of electric and hybrid vehicles through various tax benefits, including:

• Grants and Subsidies: Businesses may qualify for government grants when purchasing electric vehicles.
• Lower BIK Rates: As mentioned, electric and ultra-low emission vehicles have significantly lower BIK rates.
• Enhanced Capital Allowances: Electric vehicles qualify for 100% first-year capital allowances

7. Operational Costs and Tax Relief

Ongoing costs such as insurance, maintenance, and repairs are deductible business expenses. This can provide additional tax relief and improve cash flow.

Conclusion

The decision to buy a company car involves considering various tax implications that can affect both the business and its employees. Understanding the potential tax reliefs and liabilities associated with different types of vehicles, particularly in relation to their CO2 emissions, is crucial for making informed financial decisions. Consulting with a tax advisor or accountant can provide tailored advice to maximize tax efficiency and ensure compliance with HMRC regulations.

These updates for the 2024/25 tax year reflect the latest changes and should guide businesses in their planning and decision-making processes.