Deciding whether to have a company car, or to claim mileage can be a difficult choice for business owners. The most tax efficient choice differs depending on a number of factors.
As tax legislation has changed, there are fewer instances where it is more beneficial to have a company car as opposed to using your own car for business travel. However, there are still some occasions where having a company car is the best option. Choosing wisely could save you tax!
Having a company car means that the business pays for and owns or leases the car that you use. As an individual, you will be taxed for the use of the car. This is known as a benefit in kind. The taxable amount is a percentage of the list price of the vehicle. The percentage of the list price is dependent on the level of the car’s CO2 emissions. The higher the emissions, the higher the percentage. An expensive car with high fuel emissions means a high personal tax bill.
Having a company car impacts on other types of taxes, not just personal income tax. The company must pay Class 1A NIC on the benefit in kind, and although having a company car increases your personal tax bill, the cost of the car will count as an expense of the company and reduce the company’s corporation tax bill. The decision needs to be looked at from many different angles to make the best choice.
The most tax efficient way to have a company car is to have a cheap, non-diesel, car with low fuel emissions. The only way of having no personal tax to pay for the use of a company car is if it is exclusively used for business and it is not available for private use. This is very rare as even a journey from home to work counts as private use and the car doesn’t have to be used privately, just simply available for use, to incur a personal tax cost.
If you choose to claim mileage rather than having a company car, you can claim 45p per business mile for the first 10,000 miles in each tax year. Any excess miles can be claimed at 25p per mile. If you are a sole trader you have to use your own car, as there is no company to own it. If this is the case, you can choose to claim mileage, or alternatively, you can claim the actual cost of the business use of the car. This means if 50% of the miles travelled in the car are for business then you can claim 50% of all car costs as a business expense. You can also claim capital allowances on the business proportion of the car. Claiming the flat rate 45p per mile is slightly simpler, but using the actual cost method can save tax in circumstances where the cost of the business use of the car per mile is more than 45p.
So, which should I Choose?
Generally, claiming mileage and using a personal car is a better choice than having a company car. It is a much simpler approach as it doesn’t interfere with other taxes and NIC and it usually saves more tax. However, there are instances where a taxpayer could benefit from having a company car. This is usually when the car has a low list price i.e. it’s cheap, and the car has low CO2 emissions. It can be a complicated decision to make and it is recommended you speak to a tax expert.
We can help!
Deciding which method to choose to avoid paying too much tax can get complicated. If you would like help making the decision, get in touch. Have peace of mind knowing that our experienced tax experts will look at the different options to assess which option is right for you. Call the office on 0131 445 1825 or email firstname.lastname@example.org