Many are aware of the tax benefits of buying a car through a limited company, but few grasp the complete tax implications when selecting a personal-use car and its financing. This 3-part blog aims to offer readers an overview of crucial factors to consider when purchasing a car via a limited company.
These blog’s will explore:
- Company car choice – Electric vs fuel.
- Financing – Contract hire, lease or cash/finance, tax impact and accounting treatment considerations.
- Benefit In Kind – Company-provided car benefits.
Benefit in Kinds (BIKS)
It is to be expected that where the company has purchased the car, there is going to be some personal use. Unless the car is a pool car, where it is driven be many employees and kept at the business premises – and not taken home – then the company will need to look at the implications on providing the taxable benefit in kind of the car to the employee or director.
The benefit’s value is determined by the car’s original list price, not the expense incurred by the business. Subsequently, it calculates the benefit’s value based on the list price and applies the appropriate percentage, which corresponds to the car’s CO2 emissions. The employee is then subject to taxation at their marginal tax rate for the duration of their use. For example, in 2023/24, a fully electric car incurs a 2% tax on its list price, whereas a diesel engine emitting over 160g/km results in a 37% taxable value.
Example
Consider Crispin, the sole owner and director of a Limited company. He’s leasing a brand-new fully electric Porsche with a monthly cost of £800 and an impressive initial list price of £100,000. Consequently, the Benefit-in-Kind (BIK) value for P11d reporting in the tax year 2023/24 amounts to just £2,000. If Crispin falls into the basic rate taxpayer category (20%), his potential tax liability on this amount could be as low as £400. Moreover, the business must pay 13.8% Class 1a National Insurance Contributions (NICs) on this value, totalling £276 – the good news is that this NIC expense is tax deductible.
If Crispin owns a petrol Porsche emitting 240g/km of CO2, which maintains a list price of £100,000 and incurs monthly business costs of £80, his taxable Benefit-in-Kind (BIK) on the P11d becomes significant, amounting to £37,000 (equivalent to 37% of the £100,000 list price). This amount is subject to taxation at Crispin’s applicable tax rate. Moreover, the company’s Class 1a National Insurance Contributions (NICs) would total £5,106.
Regarding basic tax planning, the company pays just £800 per month, resulting in an annual car cost of £9,600. This expense can be deducted from Corporation Tax (CT), reducing CT liability by £2,400. However, it’s essential to note that this strategy may result in over £7,500 in personal tax and more than £5,000 in Class 1A NICs.
Therefore, it’s understandable why you might prefer to steer clear of fuel-guzzling cars when seeking tax advantages for your upcoming vehicle purchase!
Before committing to a car purchase through your business, contact your client manager for a cost and tax analysis.
If you are not a client of SAS but want to find out more, Feel free to reach out, and let’s discuss additional ways we can assist you and your business!
