Car or Mileage? Which is better?
Is it better for you to have a company car, or to buy the car yourself and charge the company for business mileage?
What actually is a “company car”?
A company car is paid for by the company, and they are responsible to pay for servicing, repairs, insurance, road fund licence (commonly known as “car tax”) and fuel for business use. It is usually made available to a director or employee, who is then charged tax on the “benefit” of having the car available for their private use.
How much tax would I have to pay?
The amount of tax payable for this private use depends upon the value of the benefit, and this is calculated based upon a percentage of the manufacturer’s list price for the car. Where a new car is bought at a discounted price, or an even cheaper second hand model is found, the benefit is still based on the full list price at the time when the car was registered.
The percentage of the cost is based upon carbon dioxide emissions, and each model should have an official CO2 rating. The percentages charged in 2016/17 range from 7% to 37%, and manufacturers’ efficiency varies, the general principle is that smaller cars tend to have lower CO2 ratings, and as engines sizes get bigger the CO2 emissions increase. Diesel cars are charged 3% more than petrol, but the overall upper limit of 37% applies to all.
The percentages were originally increased by 1% each year, but since 2014/15 this has increased to 2%, so a car charged at 22% in 2014/15 increased to 24% for 2015/16, and will now be at 26% for 2016/17. You can therefore expect that, unless you are already at the maximum, whatever you pay this year will increase next year.
If I have a company car should the company pay for my private fuel?
No, there are separate “Scale Charges” for having fuel provided for private use, and these are excessive. The fixed amount for is 2016/17 is £22,200. Always pay for your own fuel, as it will almost certainly be much cheaper.
What if I use my own car?
HMRC allow AMAP (Approved Mileage Allowance Payments) of up to 45p per mile for the first 10,000 business miles for cars or vans, then 25p per mile thereafter. These rates are tax free, and are irrespective of the car engine size, or fuel type.
This allows the Director using his own vehicle to claim £4,500 for the first 10,000 business miles, and with fuel prices currently near their lowest in several years this can represent a very healthy tax-free profit.
Surely the company gets tax relief if it buys a car?
Yes, but this is usually very restricted. When the company buys a piece of equipment, such as a computer or printer, 100% tax relief can be claimed in the same year.
For cars this does not apply, and although some very green low emission cars can get 100% relief it is more common to be restricted to just 8% per year, so when buying a £20,000 car the company could claim an allowance of £1,600 in the first year, saving just £320 in corporation tax.
Company car or mileage claim – when is one better than the other?
The general principles are that for a company car the lower the CO2 rating, the lower the tax benefit charge, so basically smaller is better.
If your business mileage is very low then a company car may suit you, as the mileage claims you make would be low anyway, and the tax you pay may be less than your costs.
For the same reason, if your running expenses are exceptionally high then a company car may be attractive – you would pay the same car benefit charge whether your annual car insurance is £250 or £2,500.
Running your own car and claiming mileage expenses would suit you if you do a lot of business miles. At the time of writing fuel is around £4.75 per gallon, so at 45 miles per gallon 10,000 miles would cost £1,056. Adding £1,000 for insurance, road fund licence and servicing gives an outlay of just over £2,000 for a tax-free mileage claim of £4,500.
What’s the bottom line?
So, the bottom line is that in our experience for most Directors mileage claims are better, but if you want to run a smaller, greener car, don’t do many business miles, or have exceptionally high running costs, then a company car may be a better option for you.