Thinking of buying a car through your limited company? It’s a question many business owners consider, especially when looking for ways to optimise costs and take advantage of potential tax benefits. 

While it can seem like a straightforward decision, there are important factors to weigh, including tax implications, costs, and how you’ll use the car which can make it a tad more tricky.

But don’t worry, in this guide, we’ll run over the pros and cons of buying a car through a limited company to help you decide if it’s the right move for your business. From potential savings to hidden costs, we’ll cover everything you need to know before making your choice.

How buying a car through a Limited company works

When your limited company buys a car, it becomes a company asset, meaning the business owns the vehicle rather than you personally. This ownership structure can have implications for tax, VAT, and how the car is used.

Key steps in the process:

1. Purchase or lease
   • The company can either buy the car outright or lease it through a business contract hire agreement.
   • Payments for the vehicle (purchase or lease) are made from the company’s bank account.
2. Ownership and usage
   • The car is registered to the company, and its primary use should be for business purposes. However, personal use is allowed, but this triggers tax implications (e.g., Benefit-in-Kind tax).
3. Tax and VAT considerations
   • The company may be able to claim capital allowances to offset the car’s cost against profits.
   • VAT on the purchase or lease can be reclaimed if the car is exclusively for business use, but restrictions apply for personal use.
4. Ongoing costs
   • Insurance, maintenance, and running costs are typically covered by the company. These expenses may also be treated as allowable business expenses.

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Pros of buying a car through a limited company

There are several potential benefits to buying a car through your limited company. These can make it an attractive option, especially for businesses that require a vehicle primarily for work purposes.

Tax relief

• Your company may claim capital allowances to offset some of the car’s cost against its taxable profits.
• For low or zero-emission vehicles, enhanced capital allowances can allow you to deduct up to 100% of the car’s value in the year of purchase.

VAT reclaim

• If the car is exclusively for business use, your company may be able to reclaim the VAT paid on the purchase or lease.
• For cars with a mix of business and personal use, VAT can’t usually be reclaimed, but 50% of the VAT on lease payments might still be eligible.

If you’re not VAT registered, you may be wondering if it’s still possible to claim back VAT. Generally, no, you need to be VAT registered. However we’d recommend you reading our “Can I claim VAT back if I am not VAT registered?” article for further information. 

Simplified ownership

• The car is owned by the company, which means all associated costs, like insurance, maintenance, and repairs, can be paid directly by the business.
• This keeps your personal and business finances separate, which is especially useful for record-keeping and cash flow management.

Professional image

• A company-branded vehicle can project a professional image and serve as a mobile advertisement for your business.

Electric vehicle incentives

• Electric or low-emission cars can be particularly tax-efficient when purchased through a company. Lower Benefit-in-Kind (BIK) tax rates and government incentives make them a cost-effective choice for environmentally conscious businesses.

Improved cash flow

• Leasing a car through the company can help manage cash flow by spreading the cost over regular payments rather than a large upfront expense.

Cons of buying a car through a limited company

While there are potential advantages to buying a car through your limited company, there are also significant downsides to consider. These can impact both your finances and the practicality of using the vehicle.

Benefit-in-kind (BIK) tax

• If the car is used for personal journeys (including commuting), it’s considered a Benefit-in-Kind (BIK).
• BIK tax is calculated based on the car’s list price and CO2 emissions, which can make high-emission or luxury cars particularly costly.
• The tax can often outweigh the savings from claiming business expenses.

Limited VAT reclaim

• If the car is used for personal and business purposes, you generally cannot reclaim VAT on the purchase price.
• For leased vehicles, you may reclaim only 50% of the VAT on lease payments if there’s any private use.

Higher costs

• Insurance premiums for company-owned vehicles can be more expensive than for privately owned cars.
• Maintenance and servicing may also incur higher costs when handled through the business.

Impact on cash flow

• Purchasing a car outright or taking on a lease through the company ties up business funds that could be used elsewhere.
• If your company is in its early stages or has tight margins, this could strain your cash flow.

Depreciation

• Cars lose value over time, and this depreciation directly affects the company's financial position if the car is owned outright.
• Selling a company car may also involve additional administration and potentially lower resale values compared to private sales.

Administrative burden

• Managing the tax implications, paperwork, and compliance (especially for BIK tax) adds complexity to your business operations.
• You’ll need to maintain detailed records of business and personal mileage for accurate tax reporting.

Restrictions on usage

• Using the car primarily for personal reasons can make the arrangement financially inefficient due to the associated BIK tax.
• HMRC closely scrutinises personal vs business usage, so incorrect declarations can lead to penalties.

Alternatives to buying through a limited company

If buying a car through your limited company doesn’t seem like the right fit, there are alternative approaches that may better suit your needs. Here are some options to consider:

1. Personal purchase with mileage allowance claims

• How it works:
  • You purchase the car personally and claim mileage expenses for business journeys. HMRC allows you to claim 45p per mile for the first 10,000 miles and 25p per mile thereafter.
• Benefits:
  • Avoids Benefit-in-kind (BIK) tax.
  • Simpler tax and administrative processes.
  • You own the car, so there’s no restriction on personal use.
• Drawbacks:
  • You can’t reclaim VAT or Capital Allowances.

If you’re curious about how much mileage expenses you can claim, we’d recommend you check out our free mileage calculator. 

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2. Leasing the car personally

• How it works:
  • Lease the car privately and charge your company for business use through mileage claims.
• Benefits:
  • Flexible terms and lower upfront costs compared to buying outright.
  • Personal control over the vehicle and no BIK tax implications.
• Drawbacks:
  • No tax relief for the business beyond mileage claims.
  • Personal responsibility for lease payments.

3. Car allowance

• How it works:
  • The company provides you or your employees with a car allowance, which is a fixed cash payment added to your salary to cover car-related costs.
• Benefits:
  • Employees have complete freedom to choose their car.
  • No company ownership, reducing administrative burden.
• Drawbacks:
  • The allowance is treated as taxable income for the employee.

Choosing the right alternative

The best alternative depends on your business’s specific needs, budget, and  how the car will be used. For example, mileage claims are often ideal for sole traders or directors who drive irregularly for work, while leasing or allowances may suit growing businesses with more frequent travel requirements.

Your mileage, and tax concerns, may vary

As you can see, buying a car through your limited company, and each individual alternative option, comes with its own personal, financial, business, and tax implications.

With all factors considered, it makes the most sense when the car is primarily used for business purposes. The ability to claim tax relief on capital allowances and running costs can provide significant financial benefits, which are even greater for EVs. 

Leasing a car through your company can also be a cost-effective option, spreading payments over time and enabling partial VAT reclaims. 

However, be aware that high BIK tax rates, restricted VAT claims, and increased administrative responsibilities can diminish the appeal, particularly for vehicles with mixed personal and business use.

Whichever route you choose for car purchase, we hope it drives your business to success!

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