If you are a director or owner of a limited company in the UK, it is important to find the best tax situation for your business while still meeting its needs. If you do it right, buying a car through your limited company can save you a lot of money on corporation tax, VAT, and even personal taxes like dividends and National Insurance. HMRC has strict rules about personal use, CO2 emissions, and financing. If a wrong choice is made, one could end up paying a lot of Benefit-in-Kind (BIK) taxes that are more than the benefits.
In this guide, we’ll talk about the pros and cons, tax effects, VAT details, other options like mileage claims or car allowances, and special incentives for electric vehicles (EVs). Using expert advice, we’ll help you figure out if it’s worth it for your situation, whether you’re a contractor racking up miles, a startup keeping an eye on cash flow, or an established business looking for eco-friendly options.
By the end, you’ll have a clear plan that shows you how to buy or lease, gives you real-life examples, and tells you how to avoid common mistakes.
What Buying a Car Through a Limited Company Means?
When a limited company buys or leases a car, it becomes a business asset. The company remains the owner, pays for it from its business account, and adds it to its balance sheet. This requires to deduct some of the costs from the taxes, but the vehicle has to be used mostly for business (like visiting clients, running errands, or making deliveries). Using it for personal reasons, like going to work or taking a family trip would mean one has to pay more taxes. The company must treat private use as a taxable benefit, and report on P11D / P11D(b).
Important:
● Used Cars vs. New Cars: Brand new cars often get higher capital allowances as they are more efficient, but they lose value sooner. Used cars cost less up front, but they might not give you as much tax relief and might need more maintenance.
● Business vs. Personal Use: If something is used for business only, all VAT can be refunded and BIK tax avoided. Vehicles used for miscellaneous purposes have a 50% VAT limit on leases and a BIK based on CO2 emissions.
● CO2 emissions and the list price: They affect BIK rates and capital allowances. Lower emissions mean bigger savings.
● Annual Business Mileage: If you drive a lot, it might be better to own the car yourself and make claims at 45p/25p per mile.
● Buy or Rent: If you hire something (like a business contract hire), you can get some of the VAT back even if you use it for personal reasons. If you buy something, you can’t get any VAT back if you use it for both business and personal reasons, but you do own it.
If you are a sole trader or a partner, you can’t claim capital allowances. Instead, you should claim mileage. Sole traders can choose to claim capital allowances or mileage but not both.
Benefits of Buying a Car Through a Limited Company
This can lower the taxes and give an edge in one’s career, especially if one drives an electric vehicle or a car that is only for work.
1. Tax Savings for Corporations: The cost of the car can be written off through capital allowances: 100% in the first year for new zero-emission EVs, 18% for low-emission EVs that go less than 50g/km, and 6% for EVs that go more than 50g/km starting in April 2021. You can fully deduct your running costs, which include insurance, maintenance, repairs, MOTs, road tax, and parking (not fines). This lowers your taxable profits. Interest on hire purchases and loans can also be deducted.
2. VAT Reclaim: Are you registered for VAT? If you only use it for business (like pool cars, vans, or taxis), you can get back 100% of the cost. For mixed use, you can get back 50% of your lease payments or fuel costs (through scale charges). There may not be VAT on used cars, but check anyway, dealers often sell them without it. Unique tip: Leave the car at work overnight to show that you used it for business and get the full refund.
3. Dividend/Employee NIC Savings: When a company pays its employees, it lowers the amount of money they take out of their own pockets, which lowers the amount of dividend tax (up to 33.75% for higher-rate taxpayers) or employee NIC, which is a way to save money without doing anything.
4. Professional Image and Branding: A car with your company’s logo on it is like a moving advertisement that makes meetings with clients more reliable.
5. Cash Flow and Flexibility: Leasing spreads costs out over time with fixed payments, no upfront costs, and maintenance included. This makes it perfect for new businesses. You don’t have to worry about depreciation because the car comes back at the end of the lease.
6. Incentives for Electric Vehicles: In 2025/26, EVs will get 3% BIK (likely to rise to 5% by 2027/28), 100% first-year allowances, and £3,750. Plug-in Car Grant (for cars worth less than £37,000) and Workplace Charging Scheme (up to 40 sites, £350 per socket). Costs of running: 2–3p per mile compared to 16p for diesel, plus eco-cred for clients. Charging at home costs 5% less in VAT; charging in public is free of VAT.
7. Easier finances: Keeps business and personal finances separate, which makes it easier to keep records. For people who drive a lot, it moves costs away from their personal budget.
A dentist buys a low-emission car for £40,000. He doesn’t have to pay £13,000 in dividend tax, claims £7,600 in allowances, and pays 1% BIK (£400 taxable at 20% = £80 tax). Total savings: £20.6k.
Disadvantages of Buying a Car Through a Limited Company
There are tax breaks, but using the car for personal or business purposes can take away some of the benefits, especially for petrol and diesel cars.
1. Benefit-in-Kind (BIK) Tax: When a car is used for personal reasons (like commuting), a percentage of the list price as tax is to be paid (including extras worth more than £100) based on the car’s CO2 emissions. Rates for 2025/26: Electric vehicles (EVs) get 3% more fuel than gas-powered vehicles (hybrids) do, and diesels get up to 37% more fuel. A car that costs £30,000 and gets 110g/km (28% BIK) costs the taxpayer £3,360 a year. The company pays 15% Class 1A NI, which is £1,260. Cheap cars with high emissions can cost more in taxes than they save.
2. Fuel Benefit Charges: For 2025/26, company fuel for personal miles adds CO2% × £28,200. VAT fuel scale charges for private use (updated in May 2025; lower for cars that are more fuel-efficient). Tip: Pay back private fuel to avoid.
3. Limited VAT Reclaim: When you buy something, you have to pay full VAT; when you lease or buy fuel, you only have to pay 50%. No reclaim if you don’t have a VAT number.
4. More expensive: Insurance Fleets cost 20–50% more, and maintenance and service may cost more through business.
5. Depreciation Impact: Cars lose 20–30% of their value each year, which lowers the value of the company’s assets on its balance sheet and when it sells them.
6. Administrative Load: For business and personal use, you need to keep detailed mileage logs. If you make a mistake, you could be fined up to £3,000. For BIK, a P11D form needs to be filled by July 6, and for Class 1A NI, P11D(b). HMRC checks on usage, wrong claims could lead to fines.
7. Strain on cash flow: Buying outright causes money held, which is hard for early-stage businesses. If you sell something which is under-valued, you have to pay corporation tax on the profit.
8. Usage Limits: BIK makes it hard to use for personal reasons; for example, commuting counts as personal.
Starting in April 2025, double-cab pickups (like the Ford Ranger) with a payload of more than one tonne will be classified as cars for BIK and capital allowances. This means higher taxes, but they will still be vans for VAT if the payload is more than one tonne.
Tax Implications in Detail
● Corporation Tax on Sale: No capital gains tax; instead, a corporation tax on the profits from the sale (with a balancing charge if the proceeds are more than the tax-written-down value).
● Class 1A NI: 15% of the BIK value, paid by the company (rate for 2025/26).
● Changes to the Fuel Scale: Claim the full VAT input, but charge a scale fee for private fuel based on CO2.
● Tax Differences Between Renting and Buying: Hiring: You can deduct payments (15% for CO2 emissions over 50g/km) and get some VAT back. Buying: Capital allowances; no VAT if the property is used for more than one purpose.
● Reporting: Employees need to fill out a P11D form, and employers need to fill out a P11D(b) form. Use digital tools to avoid fines.
For vans and motorcycles, the Annual Investment Allowance (AIA) is 100%. If you use a van for private purposes, the BIK is £3,960, and if you use a motorcycle for private purposes, the BIK is 20% of the market value.
Adjust VAT for taxis and hire cars the same way you do for vans, and use car capital allowances.
Electric and Low-Emission Vehicles: A Game-Changer for Taxes
Tax reliefs for EVs and hybrids that go less than 50g/km:
● BIK Rates: 3% for EVs (2025/26) and 8–12% for hybrids.
● Allowances: 100% FYA for new zero-emission vehicles and 18% for used EVs and low-emission vehicles.
● Incentives: £3,750 grant, charging at work (£350 per socket), a £10 VED fee for the first year, 5% VAT for charging at home, and no VAT for charging in public.
● Savings: 40–50% less expensive to run than diesel; meets net-zero goals to attract clients.
● Unique: Set aside money for batteries and chargers, but grants make up for that. Electric vehicles don’t have to pay some road taxes and congestion charges.
Example: £35,000 for a new EV—take off the full cost In the first year, you can save up to £8,750 CT at 25% and 3% BIK (£1,050 taxable at 20% = £210 tax).
