What really happens when the company buys a car?
The company can buy a car, that part is true. But the moment you use it for anything personal, including your normal drive to work, HMRC treats it as a perk you've been given, and perks are taxed. Two bills arrive, every year you have the car:
- You pay personal income tax on the car's yearly "perk value".
- The company pays employer's National Insurance on that same value, and has to report the car to HMRC on a payroll form called a P11D.
The perk value isn't small. It's worked out from the car's official price when new (not what you paid) and how much CO2 it pumps out. For a normal petrol car it's roughly a third of the car's new price: a £30,000 petrol car with mid-range emissions has a perk value of about £9,600 a year, meaning around £1,920 a year in extra personal tax for a basic-rate taxpayer, more if you're not. Every year. If the company pays for your personal fuel too, that's taxed separately, on top.
And no, you can't just "claim the business half" of a car you also use privately. That's how sole traders work, not limited companies. For a company, private use means a taxed perk, full stop.
Doesn't the company at least get tax relief on the purchase?
Slowly, and less than you'd hope. Equipment can usually be knocked off the company's profit in full in year one. Cars are the exception: they don't qualify for that year-one allowance at all.
Instead the company claims a small slice of the cost each year: 14% a year for low-emission cars, and just 6% a year for anything over the low-emission line, which catches most ordinary petrol and diesel cars. At 6% a year, a £30,000 car takes decades to give the company its full tax relief, while the perk tax above is charged every year from day one. That's the trade you're really being offered.
What's the exception? Electric cars
This is where the picture genuinely changes, in both directions at once:
- The company's side: a brand new, fully electric car gets a 100% first-year allowance, so the company takes the whole cost off its profit in year one, the very thing ordinary cars are banned from.
- Your side: the perk value of a fully electric car is 4% of the car's new price this tax year, instead of the 30-something percent a petrol car gets. That same £30,000 car, if it's electric, has a perk value of about £1,200 a year, roughly £240 a year in tax for a basic-rate taxpayer.
So the same advice that's poor for a diesel estate can be sound for a new electric car. One caution: the electric rates creep up each year and can change at any Budget, and plug-in hybrids have their own fiddly rules. Weighing one up is a genuinely good moment to speak to an accountant.
What's the simpler route for an ordinary car?
Own the car yourself, and charge the company for your business miles at a set rate: 55p for the first 10,000 business miles in the tax year, then 25p a mile. That money is tax free in your hands, and it's a real cost for the company, so it reduces the company's tax bill too. No perk tax, no P11D, no National Insurance bill.
A quick example. You drive 8,000 business miles this year in your own car:
- 8,000 × 55p = £4,400 paid to you, tax free.
- The company claims the £4,400 as a cost, saving it corporation tax.
- Perk tax on you: £0. Extra National Insurance for the company: £0.
One rule to remember whichever route you pick: your normal commute is not a business journey. Our guide on travel and mileage covers exactly which trips count.
How SimpleReturns handles it
Whichever way you go, the numbers end up in your company's accounts and tax return, and that's the part we do: mileage payments, or a company car's running costs, all handled for £99, both filings, free to start. The one piece that lives outside the tax return is the perk paperwork itself: the P11D is a payroll job, so if you do buy a car through the company, have an accountant set that side up properly. We'd rather tell you that now than after you've bought the car.