As a company director, you have a choice when it comes to buying a new car. You can either take money out of your business and use that to buy a car personally, or you can buy the car through your company. Buying a car through your Limited Company can be tax efficient, but there is a big difference between electric and petrol or diesel cars. 

 

Buying the car personally

To buy a car personally you will usually first need to take money out of your business so you can pay for the car. This normally means declaring an additional dividend on which you will pay tax at either 8.75% or 33.25%(dividend rate for 22/23) depending on your income bracket.

How can buying an electric car through my company save me tax?

There are a number of tax savings that can be made when buying an electric car through the company both personally (BIK) and for the company (corporation tax).

 

Corporation tax savings with electric cars

From 1 April 2021, when a company buys a brand new electric car outright or through a finance lease, it will qualify for a 100% first-year allowance. This means that the cost of buying the car is a deductible cost for corporation tax.

Installing a charging point at work is also currently an allowable cost for corporation tax.

For Hybrid cars with CO2 emissions of 50g/km or less, the rate at which the company gets corporation tax relief corporation tax is 18% (main rate allowance) of the car’s value claimed as capital allowances, which reduces your corporation tax bill.

 

 

Benefit-in-kind charges on fully electric cars

There are some key changes happening to the benefit-in-kind rules for electric cars which you should be aware of when thinking of buying a car through the company. The 2% BIK rate for pure electric cars has been confirmed until the end of March 2025, following that there will be a 1% increase in the 3 years 25/26, 26/27 & 27/28 bringing the rate to 5%. For Hybrids, the benefit-in-kind rate is currently up to 14% and will also increase from the end of March 2025.

 

As an example, in the 2022/23 tax year the benefit in kind value of a £90,980 Tesla Model X would be £1,820. If you are a basic rate taxpayer this will cost you £364 p/a in tax and if you are a higher rate taxpayer this will cost you £728 p/a!

 

In addition to any tax you will pay personally, your company will also have to pay employers NIC on the value of the benefit-in-kind. 

Eligible for salary sacrifice schemes

Salary sacrifice schemes allow employees to reduce their gross salary in exchange for the benefit of driving a fully electric company car. This means that the employee and employer can save National Insurance (which is calculated on a lower gross salary amount).

 

Other benefits of buying an electric car

• You are saving the planet through reduced CO2 emissions!
• Your fuel costs reduce significantly, which is especially great if you travel a lot for work
• No road tax payable on electric cars with a list price of under £40,000 (if registered before Apr 25) 
• If you drive into London you will no longer need to pay the congestion charge if your car is fully electric
• There is no benefit in kind to you personally if you charge your company car at work
• It is possible to reclaim 4p per mile from your company to cover the electricity costs when charging at home or at a public charging point.

 

 

Buying a petrol or diesel car through your business

If you buy a car through your business you will save tax by not having to declare a dividend to get the cash out of your company, however, there are other significant tax implications to be aware of.

Benefit-in-kind charge on petrol and diesel cars

When your company buys you a car this is treated as a benefit-in-kind on which you are personally taxed each year.

 

This taxable benefit can be quite steep and is based on the list price of your car. It also varies depending on fuel type (diesel cars incur a 4% increase) and CO2 emissions.

 

In addition to any tax you will pay personally, your company will also have to pay employers NIC on the value of the benefit-in-kind.

 

The mechanics of this are that either a) once a year your company issues you with a P11d which shows the taxable benefit that needs to be included in your self-assessment tax return or b) you run the benefit through the payroll.

 

Here is an example of how costly a petrol company car can be to you personally.

The 2022 Mercedes-Benz GLB 200 AMG Line Premium has a P11d value of £42,390 and emits 163g/km of CO2, putting it in the 37% BIK band. Therefore the BIK value is £42,390 x 37% = £15,684.

If you are a basic rate taxpayer this will cost you an extra £3,137 p/a in tax and if you are a higher rate taxpayer this will cost you an extra £6,274 p/a!

 

Corporation Tax savings on petrol and diesel cars

When a company buys a petrol or diesel car the rate at which it gets corporation tax relief is dependent on the CO2 emissions. It is either 18% (main rate allowance) or 6% (special rate allowance) of the car’s value claimed as capital allowances, which reduces your corporation tax bill.

 

VAT – Electric and non-electric

VAT treatment for vehicles is the same regardless of whether they are electric or not. For a vehicle purchased outright or via hire purchase the VAT is not recoverable as a car has a personal use element.

 

If the car is leased then 50% of the VAT on the lease payments is recoverable.

 

Get in touch if you are thinking of buying a car

Every situation is different so please always speak to us first before making this decision and we can give you specific advice for your personal situation and the particular car you are thinking of buying.