Lease or buy a car?
Is it more tax efficient to buy or lease a car through my company, buy privately or use the mileage allowance?
The key factors are:
- Lease or buy
- Business or personal
- CO2 emissions of car
- Personal tax considerations
How is tax calculated in the four scenarios? Let’s take a look.
A limited company can claim tax relief on a car and there are two main options; purchase or lease.
If you lease a car through your limited company, you can reclaim 50% of the VAT on the lease amounts (if you are VAT registered on the standard or cash accounting scheme – note not on the flat rate scheme).
You can claim corporation tax relief on the annual lease amount net of VAT.
Your limited company leases a car for £666.66 per month or £8,000 per annum plus VAT
The limited company can reclaim 50% of the VAT of the lease amounts:
- £8,000 x 20% x 50% = £800 per annum
The company can also claim corporation tax on the annual lease amount at 20%:
- £8,000 x 20% = £1,600
This reduces your corporation tax bill by £1,600 each year.
The rule for purchased cars is that you can claim what’s called the ‘writing down allowance’ (WDA) each year, which is a percentage based on the cost and the CO2 emissions of the car.
If the car is new and the CO2 emissions are very low (75g/km or less, or zero), the full cost of the car can be written off in the first year as an expense in the year its purchased.
However, if the car is over 75g/km, the rate is 18%, or just 8% if over 130g/km.
The VAT cannot be reclaimed on the cost of the car and second hand cars default to the 18% or 8% rules.
Your limited company purchases a car for £32,000. The CO2 emissions are 120g/km
The limited company can claim £32,000 @ 18% = £5,760
- £5,760 x 20% Corporation Tax = £1,152
This reduces your corporation tax bill by £1,152 each year.
As the owner of a limited company you are both the director and an employee. The business and claim tax relief on the car, but what about using the car as a private individual?
If the car is to be used personally, then a tax is applied called a ‘benefit in kind’ (BIK). This is a tax payable on your self-assessment for the benefit of using the car.
The calculation for the BIK is based on the list price of the car when it was new (note, not the price you paid or the second hand valuation).
It makes no difference if the car was bought out right, or leased. The amount of private use is also not taken into consideration. It’s either applied, or not applied, so unless the car is used strictly only for business and left at the business overnight, then you will be taxed for private use.
The percentage applied is based once again on the Co2 emissions of the car, ranging from high; 37% high for a gas guzzler, to low; 7% for a hybrid or electric car.
Your limited company purchases a car for £32,000. The CO2 emissions are 120g/km. Your personal tax rate is 20% (basic rate).
- The tax due is £32,000 x 25% (the percentage for the CO2 emissions) x 20% tax
Therefore, your personal tax bill for the private us of the car is £1,600.
In this example, the company has saved £1,152 in tax but you have paid £1,600 to use the car privately, a loss of £448. In this case you are better off buying the car yourself and claiming mileage.
What about fuel?
If your limited Company pays for fuel, and you are on the cash accounting scheme, you can reclaim the VAT on the fuel and corporation tax on the cost of the fuel net of VAT.
However, there is a fuel benefit which is calculated using the CO2 percentage. HMRC has a set value for fuel that the percentage is applied to, therefore the number of miles you travel is irrelevant. It’s either applied (for private use) or not (strictly business). The set rate for 2016/2017 is 22200.
Your limited company pays for all your petrol. The CO2 emissions are 120g/km. Your personal tax rate is 20% (basic rate).
- The tax due is £22,200 x 25% (the percentage for the CO2 emissions) x 20% tax
Therefore, your personal tax bill for the private us of the car is £1,110.
Although you save a little on claiming the VAT back on the fuel, the company’s gross fuel bill would need to be around £3,330 to get tax relief of £1,110, so unless you are doing a great number or miles, it’s likely the personal tax liability will be larger than the company tax saving.
So should I lease or buy privately?
It does come down to the variables; whether you lease or buy, the CO2 emissions and your personal tax rate (basic, or higher rates).
It is often more tax efficient to just buy the car personally and claim the Mileage allowance which is 45p per mile for the first 10,000 miles and 25p thereafter. This is a fully tax deductible expense for the company and has no personal tax implications.
Many of our clients this year have switched from a company car to mileage as it is more tax efficient.
What about low emission or electric cars?
The exception is low emission cars. An electric car has a BIK of only 7% (as the government have reduced the percentage to encourage consumers to buy electric cars) and there is no fuel benefit to pay – as there is no fuel!
For a 7% car with a list price of £45,000, the company would get tax relief on the full amount in the first year, which would save £9,000 in corporation tax.
As the BIK rate is 7%, personal tax is £45,000 x 7% x 20% tax = £630. So in this scenario it’s very tax efficient to purchase the car through the company.
What’s the bottom line?
This is a complex area with many variables affecting the outcome. In the examples above we have seen that unless you intend to purchase a low emission, or no emission car then it is often more tax efficient (and a much simpler process!) to choose the mileage allowance.