‘Shall I buy a car under a company or personal name?’
There have been a lot of questions around personal cars vs company cars, when you are a running a limited company. It is important to be aware of the different things to consider as in the end there are a number of tax consequences when you purchase a car under a company’s name. If you are a company director you have a choice on whether it is worth it to purchase a car under the company’s name or have it under personal name but only claim the mileage through the business use.
What You Need to Consider
- You need to be aware of the tax implications. When you buy a car under your name and for business purposes, you are only allowed to claim tax deductions it when you are traveling from your office to a client. This is due to it being a business journey that is necessary for you to do your job.
- If you buy a car under a company, then that car belongs to the company and the company does get some tax relief on the corporation tax. However, it is important to note that for the company, they cannot always deduct 100% of the cost of the car.
- If you buy a car under a company but also use it for personal reasons, then the use of company car becomes a benefit, so you do need to pay personal tax on it.
Tax Implications Explained
If you buy a car under a company then there are dual tax implications. The company does have tax relief, but as a director (who is treated as one employee) you do have to pay tax on the personal use of that car. You are able to pay some money for the personal use which will effectively reduce your personal tax, but it is still something that you need to pay out of your pocket when evaluating the cash flow.
You need to make sure you consider whether the benefit of corporation tax outweighs the personal tax liability. For instance (based on the Illustration 1 below), if you get £820.80 as company tax relief but you have to pay personal tax at £1,104, as you have a £283.20 loss, in this case it is not worth it to put the car under the company’s name.
It might be better to put the car in your personal name and just claim the mileage. When you do record the mileage, for the first 10,000 miles you can claim 45p per mile, which you can reimburse yourself from your company. Anything above 10,000 miles is 25p per mile. For most contractors/locum doctors, it probably is better for you to put the car under your personal name and claim the mileage.
Is It Better to Lease the Car or Purchase the Car?
- When you are leasing a car, you are entering a long term monthly rental agreement. You are able to claim the tax relief on the lease payment you made. If you are VAT registered, you are able to claim the VAT paid on the lease payment but that is restricted to 50% of the VAT. It can be a better option for you if it is better for your cash flow, and you are not interested to own the car at the end of the lease.
- If you buy a car and it is under your company’s name (that included a hire purchase agreement, i.e. the kind of lease that you will own the car at the end of the lease), then the company does get tax relief but you need to consider the tax implications stated above.
Carbon Dioxide (CO2) Emissions
At the moment, the government has been encouraging low emission and electric cars. The lower the carbon dioxide emission is the more tax beneficial it is. If you have a very low emission car or electric car, it is likely that from the corporation tax point of view you will get 100% capital allowance on the year it was purchased (with CO2 emission lower than 75g/km). If the carbon dioxide emission from your car is around 100g-120g per Km (which has been shown on average cases), then you can only claim 18% of the cost of the car towards corporation tax.
For personal use, if you have a very low emission car or electric car, you only get personal tax charge based on 9% (7% in 2016-17) of the ‘cost’ (list price) of the car. This may be more beneficial for you if this is the case as it does not incur much personal tax liability and you get corporation tax relief based on 100% of the cost of the car.
It is important to note that if you have a very low emission car or electric car, it may be to your advantage to put it through the company. As you do not have much personal tax charge, but from the company tax point of view you get tax relief of 100% of the cost of the car.
Steps You Need to Remember to Consider
- The dual tax implications.
- Would it benefit the cash flow or is it cost effective? Would it be cheaper for you to lease the car or buy the car?
- Carbon dioxide emission levels in comparison to the personal tax charge or corporation tax relief.
If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.