Buying a car through your limited company | PayStream

When a company car is provided to a director or employee, there are additional tax considerations that can influence the decision on the most tax-efficient approach. The provision of a company car and payment of fuel by the company are taxable benefits in kind for the recipient, i.e., the director or employee. The value of the benefit varies based on the type of vehicle, its CO₂ emissions, and the list price.

This benefit in kind value is treated as employment income and is taxed at 20% or 40%, depending on whether the individual is a basic or higher-rate taxpayer. Additionally, the company is required to pay Class 1A National Insurance contributions on the benefit value at a rate of 15% .

In practice, for limited company directors, purchasing or leasing a car through the company may not be the most tax-efficient option. Once the additional taxes payable are considered against the tax savings, it often costs more to purchase the car through the company than personally. This is especially true for cars with higher CO₂ emissions.

If you use a personally owned vehicle for business purposes, you are entitled to claim a tax-free allowance from your company for all qualifying business miles you travel. A journey qualifies as business-related if it is wholly, exclusively, and necessarily undertaken for the purpose of the trade.​

For these journeys, relief can be claimed at the HMRC-approved mileage rates for the 2025/26 tax year:​

Cars and Vans:

• First 10,000 business miles in the tax year: 45p per mile​

• Each business mile over 10,000 in the tax year: 25p per mile​

Motorcycles:

• All business miles: 24p per mile​

Bicycles:

• All business miles: 20p per mile​

These rates are designed to cover all vehicle-related costs, such as the actual cost of the vehicle, insurance, servicing, and maintenance. Therefore, reimbursement of any other amounts in excess of the approved mileage rates would also cause tax implications.​

The cost of reimbursing business mileage is a tax-deductible expense for the company, attracting Corporation Tax relief. For the 2025/26 tax year, the Corporation Tax rates are:​

• 19% for companies with profits under £50,000​

• 25% for companies with profits over £250,000​

• A tapered rate applies for profits between £50,000 and £250,000 FreeAgent​

Reimbursement of mileage at HMRC's approved rates is also tax-free when paid to you as the limited company director. If amounts are paid in excess of these rates, although the company will still receive Corporation Tax relief on the full amount, the excess would be subject to personal tax and National Insurance. Therefore, for limited company directors, it is not tax-efficient to pay more than the approved rates.​

Additionally, if you carry fellow employees in your car or van on business journeys, you can claim an extra 5p per mile per passenger, tax-free.

Owning a vehicle through a limited company designates the car as a company asset. The method of calculating a Corporation Tax deduction for this asset depends on the type of purchase and the vehicle's CO₂ emissions.​

Capital Allowances:

Instead of deducting the full purchase price of the asset in the company accounts, tax relief is provided through capital allowances when calculating the company's Corporation Tax liability. The capital allowances available depend on the CO₂ emission levels of the vehicle:​

• 100% First-Year Allowance (FYA): Available for new and unused zero-emission cars (e.g., fully electric vehicles). This allowance is set to expire on 31 March 2026 for Corporation Tax purposes.

• Main Rate Writing Down Allowance (18%): Applicable to cars with CO₂ emissions up to 50g/km.

• Special Rate Writing Down Allowance (6%): Applicable to cars with CO₂ emissions over 50g/km.

Finance Arrangements:

If the vehicle is acquired under a finance arrangement (e.g., hire purchase), any interest paid under the agreement qualifies as a trading expense. The interest amount each year is considered a cost for the company when calculating profit and will therefore receive full Corporation Tax relief.​

Leasing:

Leasing a vehicle can be a viable option. The net monthly lease payment is a tax-deductible expense and will therefore receive Corporation Tax relief. However, if the vehicle has CO₂ emissions over 50g/km, only 85% of the lease cost is tax-deductible.

Additional Considerations:

It's important to note that providing a company car to a director or employee can result in a Benefit-in-Kind (BIK) tax charge, which varies based on the vehicle's CO₂ emissions and other factors.​

Choosing between a company car and a car allowance depends on various factors, including the vehicle's CO₂ emissions, your income tax bracket, and personal preferences.​

Company Car:

If you opt for a company car, you'll be subject to income tax on the Benefit-in-Kind (BIK) value, which is calculated based on the car's CO₂ emissions and its list price. For the 2025/26 tax year:​

• Pure electric vehicles (EVs) have a BIK rate of 3%.​

• Plug-in hybrids (1–50g/km CO₂) with an electric range of 130 miles or more also have a BIK rate of 3%.​

• Traditional petrol or diesel vehicles can have BIK rates up to 37%, depending on emissions. ​

Fuel Benefit Charge:

If your employer provides fuel for private use, an additional tax applies. The cash equivalent is calculated using a multiplier of £28,200 for 2025/26. ​Your employer will also pay Class 1A National Insurance Contributions (NICs) at 13.8% on the value of the BIK.​

Car Allowance:

If you choose a cash allowance instead of a company car, the allowance is treated as additional salary.​ You'll pay income tax and NICs at your marginal rates on the full amount.​ For the 2025/26 tax year in England and Northern Ireland:​

• Basic rate: 20% on income up to £37,700.

• Higher rate: 40% on income from £37,701 to £125,140.

• Additional rate: 45% on income above £125,140.

Personal Vehicle with Mileage Claims:

Alternatively, you can use your personal vehicle for business purposes and claim mileage allowances from your employer.​ HMRC-approved mileage rates for 2025/26 are:​

• 45p per mile for the first 10,000 business miles.

   

• 25p per mile for each additional mile over 10,000.

These reimbursements are tax-free and cover costs like fuel, maintenance, and depreciation.

Your company or employer is required by PAYE regulations to notify HMRC if you are provided with a company car. This is usually done online through HMRC’s Payrolling Benefits in Kind (PBIK) service or via a P46(Car) form, which must be submitted by 5th July following the end of the tax year.

If you wish, you can also check and update your company car details through your Personal Tax Account on GOV.UK or by calling HMRC’s Income Tax general enquiry line.

Purchasing a Company Car:

VAT on the purchase of a car can only be reclaimed if the vehicle is used exclusively for business purposes and is not available for any private use by directors, employees, or anyone else. This strict criterion means the car must not be used for commuting or any personal journeys, and it should typically be kept at the business premises when not in use. Due to these stringent conditions, most businesses cannot reclaim VAT on car purchases intended for both business and personal use. ​

Exceptions where full VAT recovery is permitted include:​

• Cars intended for resale by a motor dealer.​

• Vehicles used primarily as taxis, for self-drive hire, or for providing driving instruction.​

• Pool cars that are not allocated to any one individual and are used solely for business purposes. ​

Leasing a Company Car:

• If a car is leased and used for both business and personal purposes, 50% of the VAT on lease payments can typically be reclaimed. This partial recovery accounts for the private use of the vehicle. ​

• If the leased car is used exclusively for business purposes with no private use, 100% of the VAT on lease payments may be reclaimed. However, this is rare and requires strict adherence to HMRC guidelines. ​

If a vehicle is owned or leased by your limited company, the associated running costs - such as fuel, servicing, insurance, and maintenance - are generally considered tax-deductible business expenses.​

VAT Reclaim on Running Costs:

Repairs and Maintenance: You can reclaim VAT on repairs and maintenance costs for vehicles used for business purposes, even if there's some private use, provided the business pays for the work. ​

Fuel: If the company pays for fuel used for both business and private journeys, you can either:​

• Reclaim all the VAT and pay the appropriate fuel scale charge for your vehicle.​

• Only reclaim VAT on fuel used for business trips, keeping detailed mileage records to support the claim. ​

Fuel Benefit Charge:

If the company provides fuel for private use, this results in a fuel benefit-in-kind (BIK) charge for the director or employee, leading to additional personal tax liabilities and Class 1A National Insurance Contributions (NICs) for the company.​

Mileage Reimbursement:

If the company does not pay for fuel, directors or employees can claim reimbursement for business mileage at HMRC's approved rates:​

• Cars and Vans: 45p per mile for the first 10,000 business miles in the tax year, then 25p per mile thereafter.​

• Motorcycles: 24p per mile.​

• Bicycles: 20p per mile. ​

These reimbursements are tax-free and cover costs like fuel, maintenance, and depreciation.

If you use your own vehicle for business purposes as a director or employee, you can claim tax-free mileage allowances from your company based on HMRC’s Approved Mileage Allowance Payments (AMAP) rates. These rates are designed to cover all running costs of your vehicle, including fuel, insurance, maintenance, and depreciation.​

For the 2025/26 tax year, the AMAP rates are:​

Cars and Vans:

• 45p per mile for the first 10,000 business miles in the tax year​

• 25p per mile for each additional business mile over 10,000

Motorcycles:

• 24p per mile for all business miles​

Bicycles:

• 20p per mile for all business miles​

These mileage payments are tax-deductible expenses for your company and are not taxable income for you, provided they do not exceed the approved rates. If payments exceed these rates, the excess amount may be subject to income tax and National Insurance contributions.​

It's important to note that these rates apply only to business-related travel. Commuting between your home and your regular workplace does not qualify as business mileage. Additionally, if you carry fellow employees on business journeys, you can claim an extra 5p per passenger per mile.​

For company-owned vehicles, different rules apply. Reimbursements are based on HMRC's Advisory Fuel Rates, which vary depending on the vehicle's engine size and fuel type. These rates are updated quarterly and are used when employers reimburse employees for business travel in company cars or when employees repay the cost of fuel used for private travel.

No, fuel receipts are not required to claim mileage under HMRC’s Approved Mileage Allowance Payments (AMAP) scheme. However, you must keep a detailed record of all business mileage to justify the payments made by your company or employer. Your mileage log should include:

• Date of travel

• Start and end locations

• Total miles traveled

• Purpose of the journey

Keeping accurate records ensures compliance with HMRC rules and protects against potential tax investigations.

If you are claiming mileage using HMRC’s Approved Mileage Allowance Payments (AMAP) rates - such as 45p per mile for the first 10,000 miles in your own vehicle - you cannot reclaim VAT on fuel. These rates are designed to cover all vehicle-related expenses, including fuel, and are considered tax-free reimbursements.​

However, if your company provides you with a company car and covers the cost of fuel, you will incur a taxable benefit known as the Car Fuel Benefit Charge. This charge is calculated by multiplying a fixed amount (£28,200 for the 2025/26 tax year) by the appropriate percentage based on the vehicle's CO₂ emissions. This results in additional income tax for you and Class 1A National Insurance Contributions for your employer. 

Additionally, when a company provides fuel that is used for both business and private journeys, it must account for the VAT on the private use portion. This is done by applying HMRC's VAT Road Fuel Scale Charges, which are fixed amounts based on the vehicle's CO₂ emissions and the company's VAT accounting period. ​

To avoid the Car Fuel Benefit Charge, an employee can reimburse the company for the cost of fuel used for private journeys. This reimbursement should be at HMRC's Advisory Fuel Rates, which vary depending on the vehicle's engine size and fuel type. For example, as of March 2025, the rate for a petrol car with an engine size of 1401cc to 2000cc is 15p per mile.

The simple answer is that you can’t, unless you can prove that no private mileage was ever driven. HMRC's rules on benefits are quite rigid, and if the vehicle is available for personal use, it will generally be subject to a Benefit-in-Kind (BIK) charge.

To avoid paying tax on a company car, the car must qualify as a 'pool car'. A pool car must meet specific conditions, including:

• It must be used by multiple employees

• It must be used for business purposes only, with no private use or very minimal private use (such as commuting between home and a temporary work location under certain conditions)

• It must not be allocated to any one employee, and should be kept at the business premises when not in use

If the company car doesn't meet these criteria, it will be subject to tax based on the car's CO₂ emissions and the car’s list price. The BIK charge for the 2025/26 tax year is calculated as follows:

• The annual taxable value of the benefit will be calculated by applying a percentage (which varies based on the car's CO₂ emissions and fuel type) to the list price of the car.

• This percentage ranges from 16% to 37%, with cars emitting lower CO₂ amounts taxed at the lower end of the range. The tax paid on the benefit will depend on your income tax rate (20%, 40%, or 45%).

If the company also provides fuel for private journeys, an additional fuel benefit-in-kind charge will apply, calculated based on the same principles.

To avoid or reduce the BIK tax, you can choose to not take a company car or opt for a vehicle with lower CO₂ emissions. Additionally, if you pay for private fuel yourself, the fuel benefit-in-kind charge can be avoided.