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Introduction -contractor company car vs mileage allowance
As a UK limited company contractor, let us 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 and if so, how much tax do I pay on a company car? Therefore, this is something that you should consider when you look for company car advice as a UK contracting professional? However, one of the things that is often missed in most cases is for a company car to be beneficial it needs to be a tax-efficient company car.
First, how do the tax savings for a contractor company car compare to a business mileage allowance for private vehicle use? In addition, what should we look at in both scenarios? Therefore, let’s consider how much is company car tax when you are contracting. Furthermore, we can also consider the overall savings of a company car. As a result, we can compare this to the savings when you are claiming mileage as a contractor for use of your private car.
Indeed, when you run a company car 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, your contractor accountant will be able to help you work out the tax position in terms of tax-efficient company 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-related sites.
- To attend training sessions.
- Attend conferences and seminars.
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.
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, the below shows 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 travelled 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 travelled 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 will claim your company mileage allowances under HMRC’s approved mileage rates.
As above, the rates you can claim are 45 pence for the first 10,000 miles travelled in the tax year. However, after this, the rate is 25 pence per mile for each mile. What’s more, these rates intend to compensate the employee for the overall car running costs that they incur. In fact, this will include fuel, 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.
There are a couple of other car-related costs that you can claim if you are incurring private car mileage for business journeys. Indeed, these are:
- Parking fees.
- Road tolls.
In summary, when you use your private car for business journeys, the company will save Corporation Tax (CT) 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 gone by, some notable contractor company car advice it is now 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 does not have ultra-low emissions will be more expensive to run as a company car than a private vehicle. As a result, such a vehicle will not be a tax-efficient company car. Therefore, the type of car is an important consideration when you want a company car for the future.
Company car considerations
When we consider a contractor company car, it is also worth looking at the latest electric and hybrid cars. Most importantly, these vehicles are very tax-efficient company cars. However, they can also be expensive to purchase.
Therefore, it is worth running this past your accountant if you consider 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 rates that company cars are taxed are dependent 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 or work these out yourself or via your accountant. Therefore, let’s now take a look at this more closely.
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 in your private car -considerations
A contractor company car
If we consider how do company cars work, the rules need careful consideration. 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, this 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
HMRC will need the fuel type and other details of your vehicle when you report the benefits to them. 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 BIK, 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.
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 car tax you will 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
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
| Car fuel benefit | £25,300 (in 2023/24, this increases to £27,800) x the appropriate percentage. |
| Van benefit | £3,600 (in 2023/24 this increases to £3,960). |
| Van fuel benefit | 688 (in 2023/24 this increases to £757). |
Example of private mileage v company car tax comparison for 2022/23
| 2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC | Company car (£) | Private car (£) |
|---|---|---|
| CT savings: | ||
| The company car running costs: | ||
| Fuel for the car | 2,400 | |
| Repairs of the car | 1,000 | |
| Insurance costs | 500 | |
| Road Tax costs | 200 | |
| Class 1A National Insurance | 2,538 | |
| The Capital allowances on the vehicle that costs 37,155 x 18% | 6,688 | |
| Company mileage on business -27,000 miles: | ||
| 10,000 miles at 45p | 4,500 | |
| 17,000 miles at 25p | 4,250 | |
| Total costs | 13,526 | 8,750 |
| CT saved at a rate of 19% | 2,570 | 1,663 |
| Company car tax: | ||
| 2017 BMW 4 Series 2.0TD M Sport Gran Coupe 5d Auto 1995CC. The CO2 emissions are 114 CO2 | ||
| 114 CO2 is equivalent to 26% of the list price of treating the car as a benefit in kind. | ||
| List price 37,155 x 27% | 10,032 | |
| Car fuel 25,300 x 27% | 6,831 | |
| Total benefits in kind | 16,863 | |
| Basic rate taxpayer | Higher rate taxpayer | |
| The tax on the contractor at an income tax rate of 20% | 3,373 | |
| Tax on the contractor at an income tax rate of 40% | 6,745 | |
| The Class 1A National Insurance at 14.53% | 2,450 | 2,538 |
| Total taxes on the company car | 5,823 | 9,283 |
| The overall tax savings for the company/individual: | ||
| Corporation Tax savings | 2,570 | 2,570 |
| The Taxes on benefits in kind | -5,823 | -9,283 |
| Therefore, the overall tax savings (costs) for the company/individual are | -3,253 | -6,713 |
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 fuel (and being taxed on the fuel benefit) for a company car, there is also an option to claim for company car mileage at HMRC rates. Basically, these are known as the HMRC Advisory Fuel Rates. What’s more, they represent the official mileage allowances for company cars.
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 company car mileage claims 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 business leasing 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.
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 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, of the contractors that do have a company car, many will have these types of vehicles as they are tax-efficient.
If you decide to go ahead with a company car you could consider buying this outright, or going for an electric car lease through limited company. Indeed, under both scenarios there will be a tax cost, and also a 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.
Link to Contractor Advice UK group on
