Company car versus private car. First of all, how do they compare in terms of tax savings and the taxes that are payable? What’s more, when you run a company car through your own business, there are both advantages and disadvantages. As a result of this, the tax savings and costs will depend on the type of vehicle that you are using and your contractor accountant will be able to help you work this out.
I have also written about using a company or private bicycle or motorcycle if you are consider using this method of travel.
Please note, the majority of contractors travel to work by car each day. In most cases, these journeys will be when visiting client sites. On the other hand, they could be attending training sessions and conferences.
When you use your car for business reasons, it can be confusing knowing what you can claim for. Therefore, this article aims to make this clearer for you.
An important point to note is, if 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. In contrast, when you have your own company, both you and your company are two separate legal entities. Therefore, if you want, your company can own a vehicle.
For sole traders
Please note, sole traders have a choice of two methods. Furthermore, in most cases, both will be available to work out what you can claim for mileage in your private car:
- The first option is the `mileage method.’ To explain further, you can use this method on the basis that you have never claimed for capital allowances on your car. This method works by gathering together the total business mileage travelled during the tax year. As a result of doing this, you can then convert it into mileage allowances by claiming at the HM Revenue & Customs’ (HMRC) approved mileage rates. 45 pence per mile is claimable for the first 10,000 miles travelled in the tax year (6 April to 5 April). After this, 25 pence can then be claimed for each mile thereafter; or
- The second choice is the `actual cost method.’ This way of working out what you can claim works by you taking the total business mileage and comparing this against the total overall mileage. Once you have done this, you can then calculate a percentage of the total miles that relate to your business journeys. Next, you can then 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 car running costs that are claimable as a business expense.
To sum up, whichever choice you make from the above your claim will reduce your profits. In turn, this will also reduce the amount of tax and NI that you pay on these.
Firstly, most contractors will tend to work via their own company or perhaps via an umbrella company.
Therefore, if you do use your private vehicle to travel to work in, you can claim for mileage allowances under HMRC’s approved mileage rates. Furthermore, as above, the rates that you can claim are 45 pence for the first 10,000 miles travelled in the tax year. 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. 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, your company can reimburse your mileage at the above rates, and this will save tax.
As a side note, the only other car-related costs that you can claim for if you are using your private car for business are parking fees and road tolls.
To sum up, the company will save Corporation Tax (CT) at 19% on the mileage and any parking fees and road tolls.
Company car considerations
You may be considering arranging for your company to provide you with a company car. When you do, the company will save CT on the various car running costs. Although depreciation is claimed for in the accounts, the company will also save CT on the car cost by way of Capital Allowances. These, in turn, are applied in the company’s CT computations.
If the company allows you to use the car for private journeys, there are also Benefits In Kind (BIK) that come along with this. Furthermore, BIK is taxable at the employee’s highest tax rate (20% or 40%) through their tax code that applies to their salary. Also, BIK is taxable on the employer as Class 1A National Insurance (NI) at a rate of 13.8%.
To sum up, the company will save CT on the car running costs and car costs (under Capital Allowances). However, the company and the director will also incur extra tax / NI on the BIK.
A look at hybrid vehicles
First of all, with the rising company car benefits in recent years gone by, it is now no longer beneficial to be running a company car that has a large engine size and high CO2. Because of this, many refer to such vehicles as `gas guzzlers’.
However, in some cases, it can be tax efficient to run a company car that has low CO2 emission. What’s more, it can be even more beneficial if your car is a hybrid or electric type vehicle.
Indeed, any `normal’ vehicle that does not have ultra-low emissions is going to be more expensive to run as a company car than a private vehicle.
On the other hand, the latest electric and hybrid cars which are tax-efficient at present are expensive too.
Therefore, if you are considering purchasing a company car, it is worth running this past your accountant. Most importantly, they will be able to work out if this will or will not be tax efficient for you. Indeed, your accountant can also help you to choose an option that fits your circumstances. As a result, by doing this, you should not end up paying extra taxes.
Today, the rates that company cars are taxed are dependent on the level of CO2 that they emit.
2021/22 -Company car benefit percentages
Cars registered pre 06/04/20
Cars registered post 05/04/20
|CO2||The percentage of a car’s list price that is taxed||
|Electric range 130 or more||2||1|
|For every additional 5 CO2||An additional 1||An additional 1|
|160 and above||37||N/A|
|170 and above||N/A||37|
|For diesel cars generally add a 4% supplement (unless the car is registered on or
after 1 September 2017 and meets the Euro 6d emissions standard) but the maximum
is still 37%. For emissions of 75g/km or more if the CO2 figure does not end in a 5 or 0 round down to the nearest 5 or 0.
|Car fuel benefit||24,600 x the appropriate percentage|
|Van fuel benefit||669|
Let’s look at an example:
Company car (£)
Private car (£)
|The vehicle running costs:|
|Fuel for the car||2,400|
|Repairs of the car||1,000|
|Road Tax costs||200|
|Class 1A National Insurance||2,198|
|The Capital allowances on the vehicle that costs 37,155 x 18%||6,688|
|Mileage -27,000 miles:|
|10,000 miles at 45p||4,500|
|17,000 miles at 25p||4,250|
|CT saved at a rate of 19%||2,467||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 24,600 x 27%||6,642|
|Total benefits in kind||16,674|
|Basic rate||Higher rate|
|The income tax on the contractor at 20%||3,335|
|The income tax on the contractor at 40%||6,670|
|The Class 1A National Insurance at 13.8%||2,301||2,301|
|Total taxes on the company car||5,636||8,971|
|The overall tax savings for the company/individual:|
|The Corporation Tax savings||2,467||2,467|
|The Taxes on benefits in kind||-5,636||-8,971|
|Therefore, the overall tax savings (costs) for the company/individual are||-3,169||-6,504|
To sum up, as you can see, in this example, to run the BMW through your company, it would cost you an overall £3,169 in tax costs per annum if you are a basic rate taxpayer. Furthermore, if you are a higher rate taxpayer, it will cost you £6,504 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 are claiming for mileage allowances.
What’s more, the company also reimburses the mileage allowances (£8,750 in this example) to the director. As a result, this reduces the amount of your drawings that are taxable income.
A further option is to hire a company car. Therefore, as with the company owning the vehicle, there will be benefits in kind applied. However, the company can claim the hire costs as an expense (as opposed to claiming for the cost of the car). Also, it can reclaim 50% of the VAT on the hire costs if the business is VAT registered, and it is operating under the standard VAT scheme.
In conclusion, this example shows that you would be considerably worse off by running the BMW through your company due to the high CO2. What’s more, a vehicle with much lower CO2 may prove to be much more worthwhile, and I will cover this in another article.
Finally, today the majority of contractors run their vehicle as a private car through their company. In contrast, the few that do have company cars tend to have electric or hybrid vehicles or a lower CO2 if they are using a normal car. What’s more, very few, if any, at all run a `gas guzzler’ because the tax repercussions are not worth it with today’s tax system.
Link to Contractor Advice UK group on LinkedIn https://www.linkedin.com/groups/4660081/