How can I save money putting a car through my limited company?
The extra national insurance and personal tax created through the benefit in kind may outweigh any corporation tax and VAT savings you are going to make by putting a car through a limited company.
Over the years, the exact answer to this question has changed often as the government has pushed different agendas and tax regimes. With the advent of electric cars, the calculations have changed again, and maybe running an electric company car through your limited company can save you some money.
A typical question from our owner-managed business clients is, “How can I save money putting a car through my Limited Company?”. Historically, we have often said, “Hmmmmm, maybe you can’t!”
Electric car tax rules
The tax rules around running an electric car in a Limited Company now mean that running a company car can be an excellent option for the owners or employees of a limited company.
While it was often much more tax-efficient to run a car privately and claim business mileage in the past, the generous company and personal tax benefits can make going electric an excellent option for the 2020’s. Lower running costs may save your business money as well.
Read on to find our discussion of all the factors in the decision. We discuss electric vehicle advantages and disadvantages, leasing and buying, and all the tax implications.
Environmental advantages of electric cars for your company
An obvious advantage of electric cars is that they can be more environmentally friendly. Zero co2 emissions at the tailpipe mean fewer greenhouse gases and fewer particulates in our cities. As the proportion of renewable electricity (43% in 2020) increases, this can mean very low total emissions.
Manufacturing a new car creates an environmental impact. Still, most studies show that replacing an old car with an electric vehicle is the environmentally friendly way forward if you do medium to high mileage. The lower co2 emissions outweigh the manufacturing emissions after a couple of years.
Running costs of electric vehicles
Another advantage to running a limited company electric car is the potential saving in fuel costs. While street-based charging points may be expensive, an electric vehicle can have a significantly lower cost per mile than petrol or diesel if you charge at home. A 2020 article in Car Magazine found that a small electric car could have up to half the cost per mile than the equivalent small petrol or diesel car.
Road tax can is zero for pure electric cars, though if you lease, this is usually taken into account in the lease price. The “plug-in grant” from the government is £2500 but is now not available for cars over £35,000.
Range and charging electric cars for your company
One disadvantage of electric vehicles is range. Electric cars may still not suit you if you are a sales rep covering tens of thousands of miles up and down the country.
A 2021 Diesel Mercedes C Class has a 14.5-gallon tank, so at 50 mpg on the motorway, that’s a range of 725 miles. To refill will only take a few minutes.
A Tesla Model 3 Long Range has a theoretical range of 360 miles and will take 34 minutes to charge on a supercharger from 10% to 80%. There are not that many superchargers around, though, and standard chargers will take much longer than this.
If you live in a flat or a house where you cannot park nearby, charging will be much more difficult and can make electric a non starter at the moment. The best way to run an electric car is to charge overnight from your domestic electricity or during the day if you park at work. There are various government grants available to help pay for a rapid charging point at home or your work premises, with full details here.
Cost of an electric company car
A disadvantage of electric is a pretty basic one, the price of the car. If you buy it, the price of the car and the leasing costs are substantially more than the equivalent petrol or diesel car.
For example, the list price of a Tesla Long Range Model 3 is £49,000, whereas the list price of a 3 Series BMW starts at around £30,000. The cost of purchase can be reduced by the government “plug-in grant,” which is now £2500, but this is no longer available for cars over £35,000
Leasing prices are similarly higher with a Tesla Model 3 Long Range costing £464 + VAT for a business lease vs. under £400 + VAT a month for a BMW 3 series for an equivalent lease. The differential is much smaller than the comparison between the outright purchase prices.
Benefit in kind tax
The benefit in kind of a petrol or diesel company car often made it the wrong choice for the owner or employees of a limited company to run a company car. The benefit in kind on a BMW 3 Series 318d Diesel saloon is an astonishing £10,169. And if the company pays the private fuel, this adds another £7,148 (we would always advise an owner to reimburse the private fuel). In the worst case, if the director or employee were a 40% taxpayer, they would have an additional income tax bill of nearly £7000.
Conversely, if we look at a Tesla Model 3 Long Range, the benefit in kind is £484 for the car and £0 for the fuel, which leads to an income tax bill for a 40% taxpayer of £194. These rates are dues to go up slowly over the next few years, but the difference is vast. If you want to check the implications of different types of cars, there is a good benefit in kind tax calculator here: https://comcar.co.uk/companycar/tax/select/.
Company National Insurance
Additional to the tax cost for the individual who runs the car, the company also has a cost. While the individual doesn’t pay national insurance on benefits in kind, the company does in the form of Class 1A National Insurance. The amounts due for petrol and diesel cars can be eye-watering.
Class 1A National Insurance is currently set at 13.8% of the benefit in kind, so in the examples from above, the national insurance for the BMW diesel would be over £2,000 if the private fuel was provided and under £100 for the Tesla.
Many businesses choose to contract hire their company cars as this has many advantages. The most significant benefit is the fact that when the hire is over, they just hand the car back. Assuming there is no damage and the car is under the agreed mileage, nothing will be left to pay.
Conversely, when trying to sell a car that has been purchased outright, it isn’t easy to obtain the market price for a car as a dealer will need to make a profit on the purchase and subsequent sale. In our experience, this nearly always skews the comparisons between buying and leasing.
Buying outright and capital allowances
One advantage of buying outright or on a hire purchase agreement is that you can claim capital allowances for your company. At the moment, the allowance is 100% in the first year which means you can make a significant tax saving in year one.
For example, if the car costs £49,000, your corporation tax bill will be reduced by £9310. However, there is the significant cash flow effect of purchasing the car to consider. Even on HP, the monthly payments are usually more than contract hire.
The general rule of VAT on business cars is that if there is any private use at all, the VAT can not be reclaimed on a purchased car. As company cars usually have some element of personal use, this means that if the car is purchased outright or on hire purchase, there will be no VAT reclaim. Leasing is slightly different in that 50% of the VAT on lease payments can be reclaimed.
Should you run a limited company electric car?
If you can live with the range anxiety, a limited choice of models, and have a driveway to charge your vehicle on, fully electric cars are becoming an obvious choice for the owner-managed business owner or their employees.
The lack of a considerable benefit in kind has flipped the usual company car tax calculations on its head. Savings can be made in personal tax, national insurance for the company, and through lower running costs.
These advantages more than outweigh the additional costs of the initial purchase. We are so sure of this that we are replacing our cars with electric.
If you would like any help deciding how to run the company cars in your limited company, please do not hesitate to get in touch here.