Company car v Your own car

Posted on 5th October 2024

Arguably the most common decision a business owner will have to address. When deciding between a company car and using your own car for work purposes, several factors come into play, including tax implications, running costs, and personal preferences. Here we address some options and relevant issues that may help you decide what is the best fit for your circumstances.

Should I buy a company car?

Pros:

No upfront purchase cost: You don’t need to buy the car; the company provides it.

Maintenance and servicing: Most company car schemes include servicing, repairs, and insurance, so you won't pay for these.

Depreciation: You don’t bear the financial loss of the car depreciating in value.

Convenience: Having a company car means less hassle in terms of maintenance, insurance, and repairs.

Cons:

• Benefit-in-Kind (BIK) Tax: As mentioned later on in this article, you’ll be taxed on the value of the company car as a benefit-in-kind.

• The tax can be significant, especially for cars with higher CO2 emissions.

• Limited choice of vehicle: You may have to choose from a limited range of cars, depending on your company's policy.

How are company cars taxed (BIK)?

HMRC imposes a Benefit-in-Kind (BIK) tax on the driver of the company vehicles unless the vehicle is only used 100% for business purposes (extremely difficult to prove).

This means that the value of the car is added to your taxable income, and the amount of tax you pay depends on the vehicle’s CO2 emissions, its original cost value, and your personal tax rate. Various factors are taken into account to arrive at what is called a 'cash equivalent' value.

The amount of BIK tax can be calculated here

You should note that even if you have a 2nd hand company car that was purchased for lets say £20,000, the BIK is based not on the £20,000 but on the manufacturers list price of the car when new!

In addition the company that provides the car to the Employee or Director also pays for the of doing so. This is in the form of a National Insurance tax on the 'cash equivalent' value. Again, the amount to pay will be based on the vehicle’s CO2 emissions and its value when brand new.

HMRC can collect the BIK tax in a number of ways, most commonly its through monthly deductions from your wages.

Here are some examples of the cash equivalent values/P11D BIK

Vauxhall Astra - 5 Door 1.2 Turbo Griffin Petrol Manual (123*) £7,190

Toyota Corrolla - 5 Door 1.8 Design Petrol/Hybrid Auto (104) £8,035

Volkswagen Golf - 5 Door 2.0 TDI Match Diesel Manual (117) £8,229

Volkswagen Passat Estate - 1.5 TSI R Line Petrol Auto (129) £12,858

BMW - 5 Door 320i Petrol Auto (148) £13,674

* This is the vehicles CO2 rating.

So, in the above example of the Toyota Corrolla which has a BIK/P11D Cash equivalent value of £8,035 so if you were a lower rate tax payer (20%) you would finish up paying £1,607 per tax year (£8,035 * 20%)

In the above Toyota Corrolla example the employer will have to pay a national insurance charge of £1,109.

So, in general the lower the list price of the car and the lower CO2 rating the less tax you will pay.

Please note that these are just general examples based on no Employee/Director capital contribution towards the vehicle purchase and is based on the vehicle being available to the Employee/Director for the whole tax year.

How we help Limited Co's

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What about my company getting me a hired or leased car?

A company car that is provided to the Employee/Director that has been leased or is on any form of HP, rather than an outright purchase is still subject to the normal BIK and cash equivalent tax calculations. If the company hires a car for you an its available for any private use and you have use of it for more than 30 days then this is usually subject to BIK tax rules.

What if I use my own car?

An alternative to having a company car is for you to use your own car and to claim a mileage allowance.

You can claim back through your company as much as you see fit but please be aware that if you claim above the HMRC advisory amounts this will be classed as taxable income.

The HMRC advisory rates are 45 pence per mile up to 10,000 miles per tax year and then anything above 10,000 is claimed at 0.25 pence per mile.

What does a mileage allowance cover?

The mileage allowance covers, fuel/fluids, servicing, repairs, tyres and insurance. All of these items should be purchased by the driver from their own personal bank account.

Other costs associated with business travel such as parking, tolls and congestion zone charges can be paid directly by the company as the mileage allowance does not include these.