Buying a company car as a contractor

The majority of contractors use their personal car to travel to and from their clients’ offices. Those who do will use HMRC’s Mileage Approved Rates (MAPs) to claim for the cost of these journeys. However, they also have the option of purchasing a company car through their limited company. Check out our article on ‘Fuel efficient cars for contractors’ to find out more.

From understanding the tax implications to knowing which option is better for you, this article discusses everything you need to know about buying a company car as a contractor.

How it works

If you decide to purchase a car through your limited company, the company will also be responsible for the maintenance and servicing costs of the car. These will be put through the accounts under day to day running costs.

How it is taxed

The amount of tax you pay on buying a company car depends on several factors, which include:

• The list price of the vehicle
• CO2 emissions of the car
• The type of fuel it uses (electric, petrol, diesel)
• Whether the company will pay the fuel costs
• Which personal income tax the vehicle benefit cost falls in to

As your limited company is providing you with a car you have to pay an income tax charge on the value of the benefit in kind you receive during the tax year. Plus, the company has to pay Employers Class 1A National Insurance Contributions on the value of the benefit.

The benefit charge is calculated using the list price of the car and its CO2 emissions. You then multiply the car’s list price against the corresponding fixed rate percentage:

CO2 emissions (g/km)	2018/19 Benefit in Kind %
0-50	13%
51-75	16%
76-94	19%
95-99	20%
100-104	21%
105-109	22%
110-114	23%
For each additional 5g	Add 1%
Until maximum reached	37%

Source: HMRC

Note: These rates are based on cars that are electric or use petrol. For a diesel car add an extra 4% (up to the maximum of 37%).

A real life example

This example is based on a limited company purchasing a Mercedes that costs £32,000 with CO2 emissions of 108g/km.*

Car benefit charge: £32,000 x 22% = £7040

Multiply this figure by the personal income tax rate the charge will fall into. If you’re a basic rate payer this will be £7040 x 20% = £1408 or for a higher rate tax payer, it will be £7040 x 40% = £2816.

In addition to this your limited company has to pay Employers Class 1A National Insurance Contributions – £7040 x 13.8% = £971.52.

*This is a very simple example to illustrate how the system works and doesn’t consider other variables.

Which option is the best?

One of the advantages of buying a company car is that the capital cost of the car can be offset against your corporation tax. Which can also be spread over the lifetime of the vehicle, resulting in the company paying less tax.

Whilst you can’t claim VAT on the car’s purchase cost, you can claim VAT on its running costs.

However, the example above does illustrate how complex calculating company car taxation can be. We strongly suggest you seek advice from ourselves before deciding to buy a company car as you may be better off using your personal car and claiming for mileage costs. Give us a call 01962 867550 to discuss your options.