Company car v mileage in private car for UK contractors

Introduction -contractor company car vs mileage allowance 

As a UK limited company contractor, let’s compare the costs of a company car vs mileage allowance in your own private vehicle for business journeys. Certainly, many UK contractors will consider should I get a company car (UK). Therefore, how much tax do I pay on a company car? Indeed, company car vs mileage reimbursement is something you should consider when you look for company car advice as a UK contracting professional. However, business owners often miss that for a company car to be beneficial, it should be a tax-efficient company car.

First, how do the tax savings compare for a contractor company car or mileage reimbursement for your private vehicle use? Basically, what should we look at in both scenarios? Let’s consider how much is company car tax when you are contracting. Furthermore, let’s consider the overall savings of a company car. Let’s also look at how much tax you’ll pay personally, when you run one and incur company car private mileage. As a result, we can compare this to the savings when you are claiming mileage as a contractor for use of your private car.

When you run a company car (UK) through your business, it has advantages and disadvantages. As a result, the tax savings and running costs will depend on the type of contractor car that you use. What’s more, this will also depend on how many miles you travel in the vehicle. However, when searching the best work vehicles for contractors in terms of tax efficiency, your contractor accountant can help you. Basically, if you can provide with them of specific details of the vehicle, they can work out the tax position in terms of tax-efficient company contractor cars.

Initial thoughts -company car vs mileage allowance

What to think about first

In most cases, UK limited company contractors will travel to work each day by car. However, since the pandemic some will now spend more time working from home.

The journeys by contractors who travel to work by car will consist of visiting their main client site(s). Furthermore, business journeys by car could include:

• Visits to other work-type sites.

• To attend training sessions.

• Attend conferences and seminars.

Common questions 

There will be common questions from UK contractors and business owners alike with regard to how they travel to work. Indeed, when they are considering using a company car or claiming business mileage these questions will include:

• Is a company car worth it?

• How does a company car work?

• How much tax do you pay on a company car?

• Can you use a company car for personal use?

• How much does a company car cost to run?

• How to work out mileage costs?

• Can you claim mileage on a company car?

• How to report personal use of company vehicle?

In this article, we’ll consider all of these and look at how much tax will I pay on a company car. In addition, we’ll look at what you can save when you use your private vehicle for business journeys.

Know what you can claim

Knowing what you can claim for can be a bit confusing when you use your car for business reasons. Therefore, this article will aim to make this clearer for you.

Most importantly, when you are a sole trader, there is no actual concept of a company car. Indeed, this is because you and your business are the same legal entity. On the other hand, when you have your own company, both you and your company are two separate legal entities. Therefore, when you have your own contractor limited company, it can own a vehicle and provide this to you as an employee of your company. 

When we consider is mileage taxable, providing you only claim for genuine business journeys, your mileage allowances will be tax-deductible.

Company car versus mileage allowance -mileage rates when using own car for work mileage 

For sole traders 

Sole traders have a choice of two methods regarding how to calculate mileage for taxes. Therefore, as a sole trader, we show below how you can work out how to claim mileage on taxes, when you use your own car for your work journeys:

• The first option is the `mileage method.’ To clarify, you can use this method if you have never claimed capital allowances on your car. What’s more, this method gathers the total business mileage for their business travels during the tax year. As a result, you can convert it into mileage allowances by claiming at the HM Revenue & Customs’ (HMRC) approved mileage rates. Basically, 45 pence per mile is claimable for the first 10,000 miles you travel in the tax year (6 April to 5 April). In addition, after this, 25 pence can then be claimed for each mile after that; or

• The second choice is the `actual cost method.’ What’s more, this way of calculating what you can claim takes the total business mileage and compares it against the total overall mileage. Indeed, once you have done this, you can calculate a percentage of the total miles related to your business journeys. Further, you can take this percentage and apply it against the total cost of all of your car’s various running costs. As a result, you can then calculate the proportion of your vehicle running costs that you can claim as a business expense.

To sum up, whichever choice you make from the above, your claim will reduce your taxable profits. As a result, this will also reduce the tax and NI you pay on these. 

For contractors

First, most contractors will tend to work via their own company or perhaps via an umbrella company. Therefore, you can go ahead claiming mileage on taxes when you use your private vehicle to travel to work. Furthermore, you’ll claim your company mileage allowances under HMRC’s approved mileage rates. In turn, this will enable your company to pay you a private car mileage allowance.

As above, the mileage reimbursement rate for independent contractors is 45p for the first 10,000 miles travelled in the tax year. However, after this, the rate is 25p per mile for each mile thereafter. What’s more, when you go ahead and calculate mileage claim, these rates intend to compensate you as the employee for your overall car running costs for the vehicle. In fact, this will include your contractor fuel expenses, any repairs and maintenance, road tax, and insurance. Therefore, if you are running your own company and you are using your private vehicle for business you can claim mileage on taxes. As a result, your company can reimburse your company mileage at the above rates. In turn, this will save company tax.

What’s more, there’s two other car-related costs that you can claim when using a private vehicle for business journeys. Indeed, if you claim private car mileage for business journeys, these are:

• Parking fees.

• Road tolls.

In summary, when you use your private car for business journeys, the company will save Corporation Tax (CT). This CT saving will be at 19% or 25% on the company mileage in your private car. In addition, it will also save CT on any parking fees and any road tolls.

Company car versus mileage -a look at company cars

Initial considerations

First, with the rising company car benefits in recent years, some notable contractor company car tax advice it’s usually no longer beneficial to run a company car. Basically, as part of our company car v mileage for a private car comparison, this is especially the case where the vehicle has a large engine size and high CO2. Therefore, because of this, many refer to such vehicles as `gas-guzzlers’.

In some cases, it can be beneficial to run a car though your business, if it is a tax-efficient company car. However, for it to be tax-efficient the company car should have low CO2 emissions. What’s more, it can be even more beneficial if your car is a hybrid or electric-type vehicle. Most importantly, most electric cars and some hybrid vehicles are tax-efficient company cars. Therefore, electric cars are becoming more popular daily, and a plug-in hybrid car is another popular option.

Low emissions

Indeed, any `normal’ vehicle that doesn’t have ultra-low emissions will be more expensive to run as a company car. As a result, such a vehicle will not be a tax-efficient vehicle. Therefore, the type of car is an important consideration, when you want a company car for the future.

Company car considerations

As part of this mileage reimbursement vs company car comparison, when a contractor considers looking for a company car, it’s also worth looking at the latest electric and hybrid cars. Most importantly, if a contractor’s car is electric, these types of vehicles are very tax-efficient company cars. However, for those contractors’ cars that are electric, they can be expensive to purchase.

Many will consider are company cars worth it in terms of the additional tax. These come in addition to extra reporting that you have to do for a company car. Therefore, it’s worth running this past your accountant if you are considering purchasing a company car. Indeed, they will be able to work out if your choice of vehicle will or will not be a tax-efficient company car for you. As a result, your accountant can also help you to choose an option that fits your circumstances. In conclusion, if your accountant calculates the best option, you should not end up paying any extra taxes.

Today, the way that you pay tax on company cars depends on:

• The level of CO2 that the car emits from petrol and diesel cars; and

• The electric range for electric cars.

You can use a company car tax calculator to work out any benefits. Alternatively, you can work these out yourself or via your accountant. Therefore, let’s now take a look at this more closely.

If you’re thinking about a company car and claiming mileage on company car instead of being provided with fuel by your employer, generally you can do this. When you do, you will not have a fuel benefit. However, the mileage rates are set by HMRC and are lower than the ones shown above for private vehicles.

Road tax for company cars

When you own a car in the UK, you must pay road tax annually. What’s more, this charge is based on the CO2 emissions of your vehicle. In addition, when you buy a new car in the UK, there is a fee of £55 if you register and tax a car for the first time with DVLA.

It is key to note that there is currently no vehicle excise duty (road tax) on electric cars. Therefore, if you buy an electric vehicle:

• You will still have to tax your vehicle from the outset; and

• Then renew your electric car road tax every 12 months, even though there is nothing to pay.

If you buy a hybrid car, the road tax rate will depend on the year of registration and CO2 emissions. What’s more, more information can be found online regarding your vehicle type.

Company car vs mileage allowance -company car tax explained

A contractor company car   

If we consider how do company cars work, then indeed you should give careful consideration around the company car tax rules. Indeed, all company car drivers should do this before they go ahead with a company car. Therefore, you can look into a company car and what sort of vehicle you should buy or lease. What’s more, if you go ahead, you will be arranging for your company to provide you with a company car. As a result, when you do, the company car expenses will be paid for by the company and it will save CT on the various company car running costs. Meanwhile, although depreciation on the actual vehicle cost is claimed in the accounts, the company will save CT on the car cost through Capital Allowances. Therefore, these, in turn, are applied in the company’s CT computations.

When we investigate how does company car tax work, if the company allows you to use the car for private car mileage journeys, there is a tax cost. Therefore, as a result of the private miles in company car, the tax cost for company car personal mileage is based upon what is called Benefits in Kind (BiK). However, the BiK is what results in the company car tax (UK). Therefore, we will need to know how to calculate company car tax.

Calculate the benefits and tax on company car

HMRC will need the fuel type and other details of your vehicle when you report the benefits to them on form P11D. Therefore, as mentioned, when we look at how to work out company car tax, this is calculated on the BIK. Indeed, when we work out the car’s P11D benefit in kind, this is based on either:

• The car’s CO2 emissions when it is a regular petrol or diesel car, and most hybrid cars. CO2 represents the amount of carbon dioxide that the vehicle emits. Therefore, once the CO2 emissions figure is known, you can calculate the percentage rate. Certainly, in turn, this is applied to the car’s list price to calculate the BIK.

• The car’s electrical range, if it is an electric car. Therefore, once the electrical range is known, you can calculate the percentage rate. Certainly, in turn, this is applied to the car’s list price to calculate the BIK.

The benefit percentage company car rates that apply can be found in a company car tax table and HMRC’s rates can be found here.

Company and personal taxes

As the director/employee who is provided with the company car, you will pay tax on the benefit via your tax code, which is applied to your annual salary. Meanwhile, the employer will pay National Insurance on the benefit. Therefore, how can you determine the amount of company vehicle tax or BiK tax you’ll pay?

• BIK is taxable on the employee at their highest tax rate (the tax bands are 20%, 40% or 45%). As a result, the BIK is included in their tax code that applies to their salary.

• The BIK is taxable on the employer as Class 1A National Insurance (NI) at a rate of 13.8%. The rate in 2022/23 was 14.53% due to a mixture of rates as the government increased the rate in Spring 2022 then reverted on the change in Autumn of that year.

To sum up, a company car will save CT on the company car running costs and actual car purchase price (under Capital Allowances). However, the company and the director will also incur company car tax/NI on the BIK. Therefore, we will look at how to work out and calculate company car tax compared to using your private car. 

A comparison of company car vs mileage allowance in private car

Now, we will take a look at using a company car or mileage reimbursement for your private vehicle for business journeys.

The BiK rates

The current company car BIK rates start at:

• 2% for electric cars.

• A rate of 23% for the greenest hybrids.

• 25% for any car with 100 g/km CO2.

From 14%, the bands rise in 1% increments up to a maximum of 37%. What’s more, diesel models are subject to a 4% supplement, should they not meet RDE2 tests.

Company car vs mileage allowance -the company car tax bands and BIK rates

As part of this company car tax guide, HMRC have a table which shows how the percentage BIK rates vary with vehicle CO2 and electric-only range. Indeed, this represents petrol, diesel, hybrid and electric-related BIK rates for the tax years 2022-2025. What’s more, there is a 4% supplement for diesel cars however, diesel-hybrids, the 4% diesel surcharge does not apply.

How to calculate BIK

Example of mileage in your private car v company car tax comparison for 2022/23

Summary of result of the above example

As you can see in the above company car vs personal car calculations, there are overall costs for the company car. However, on the other hand there are overall tax savings of £1,663 on the mileage cost for the personal car. This example is based on a BMW 4 Series 1995CC however when you run the calculations with an electric car the company car option will be much more favourable.

If you would like to run your own figures to see the outcome for company vehicle vs mileage reimbursement, you can search online for a company car vs personal car calculator. When you do this, you can compare company cars and also compare company car tax outcomes.

Contractor company car and company car tax -conclusion 

In the above Company car versus mileage comparison, we now have the results. To sum up, as you can see, in this example, to run the BMW through your company, how much tax you will pay will depend on your income tax bracket. As a result, the overall tax bill would be £3,253 in company car tax costs per annum if you are a basic rate taxpayer. Alternatively, if you are a higher-rate taxpayer, it will cost you £6,713 in tax costs.

In contrast, you will make overall annual tax savings of £1,663 if you keep the car as a private vehicle and claim company mileage allowances.

The company will also reimburse the mileage allowances (£8,750 in this example) to the director tax-free. As a result, this reduces the amount of your drawings that are taxable income.

In conclusion, the company car advice in this example shows that you would be considerably worse off running the BMW through your company due to the high CO2.

If you are looking to work out the tax position for your car, you can find director company car tax calculators and a mileage claim calculator (HMRC) online.

Other considerations

Company car vs mileage allowance -company car mileage rates

Instead of claiming for contractor fuel expenses (and being taxed on the fuel benefit) for a company car, there is also an option to claim for a company car mileage rate by using the official HMRC rates. Basically, these are known as the HMRC Advisory Fuel Rates and they are the official HMRC mileage rates (company car). Therefore, when you use the official mileage allowances for company cars, just like with a personal car, when you claim for a mileage allowance (company car):

• Your business can reimburse the company car mileage allowance amounts to you.

• The company will save tax on the company car business mileage. 

The official rates for company car mileage are lower than the HMRC mileage rates for private cars. Indeed, this is because they re-compensate the individual for the fuel costs, rather than all the car running costs. Therefore, when you run a company car, you can make a company car mileage claim each time you travel on business under these rates.

Hire car option

A further option in respect of a contractor company car is to consider car leasing. In the same vein, with the company owning the vehicle, when it comes to a contractor car lease though your business there will be a benefit in kind. As a result, this is based on the same method, by applying a percentage rate to the vehicle’s list price. Therefore, once again, you should look for a tax-efficient company car as explained earlier.

Under the contractor lease car option, a company can claim the hire costs as an expense (as opposed to claiming the cost of the car). In addition, the business can reclaim 50% of the VAT on the hire costs if it is VAT registered and operates under the standard/normal VAT scheme.

Going for the hire car option in the above example would result in a similar outcome: being worse off by hiring the car through your company. However, like when you hire a tax-efficient company car such as an electric vehicle, you will be better off in terms of tax costs and savings.

Travel by bicycle instead

We have written about using a bicycle or motorcycle for your work journeys. Basically, in this article, we look at the considerations between company-owned and privately owned bikes. What’s more, this is a good read if you are considering using this method of travel. 

Final thoughts

Today, when we consider company car versus mileage allowance, most contractors will run their vehicle as a private car. As a result, they can claim business mileage for their private contractor cars through their company. Indeed, when you are a UK contractor, you may wish to consider company cars for directors. Consequently, if you do, it is likely you will look at electric or hybrid vehicles or a vehicle with low CO2 emissions. Finally, in our comparison of company car or mileage reimbursement, of the contractors that do have a company car, many will have these types of vehicles as they are tax-efficient.

After you consider company car vs mileage allowance, you may decide to go ahead with a company car. Therefore, the next decision is whether to buy this outright or on hire purchase, or go for an electric car lease through limited company. Indeed, under both scenarios there will be a BiK tax you’ll pay, and also a company tax saving. However, if you decide to run a vehicle through your company, it is best to check that it is a tax-efficient company car first. Finally, in today’s world very few contractors run a `gas-guzzler’ petrol or diesel model. In conclusion, this is because the tax repercussions are not worth it under the current tax system.

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