If you are a Sole Trader buying a car through your business can be tax-efficient.
However, remember that you cannot claim for buying personal items through your business. This means you’ll only ever be able to claim the business use portion, and if HMRC asks you’ll need to show evidence of how you use your car for work purposes.
The easiest way to work out how to split your car between business and personal use is to assign a simple percentage. For example, you may use your car 75% for business and 25% for personal travel. Keep a simple spreadsheet in the car to note down business and personal trips, or get a mileage tracker app on your phone – we recommend MileIq.
The method for tax relief will depend on how you pay for the car and its CO2 emissions.
Car Purchase Options
If you are self-employed and buying a car, there are 4 ways you can expense the cost:
1. Claim mileage
2. Buying a car outright
3. Hire purchase
4. Claim lease payments
1. Claim a Mileage Allowance for using Your Personal Car
If you use your own car you can simply claim a fixed amount per mile every time you use it for business reasons. You’ll need to record the miles you do, keeping a detailed log of where you have travelled.
If you choose to claim mileage allowance you cannot claim for either the purchase of your car or any running expenses. The allowance is set higher than the cost per litre of fuel to cover running costs and wear and tear.
Up to 10,000 business miles – 45p per mile
Over 10,000 business miles – 25p per mile
Car Share – Additional 5p per person!
Motorcycle – 24p per mile
2. Buy a Car Outright
Another way to buy a car through your business as a sole trader is to pay up front and own it outright.
If you choose this option, you can expense the cost of the business use element of your car, and you will get tax relief by using Capital Allowances.
Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years. You will claim for a portion of the car cost, depending on its emissions, using Capital Allowances:
If you choose to use this method for your new car, then you can also claim for fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.
Electric (0% emissions) – 100% in year of purchase
up to 50 g/km – 100% in year of purchase
51g/km-110g/km – 18% per year Capital Allowance
111g/km or more – 8% capital allowances
3. Lease a Car
Leasing is another option for buying a car through your business if you don’t want to own it outright.
In this case, you’ll claim the car lease payment against your taxes. You can also claim for car expenses like fuel, servicing, insurance and repairs.
4. A Hire Purchase Agreement
If you choose to buy a car on HP then, as with buying a car outright, you can claim capital allowances as well as finance charges up to £500 associated with the agreement.
What about VAT?
If your business is registered for VAT you 100% cannot claim VAT on the purchase of a car by any method. You can, however, claim 50% of the VAT on the payments if you choose to lease a car through your business. You can also claim Vat on servicing and on fuel, subject to a Fuel Scale Charge.
Get in touch
If you would like further information on these areas please contact one of the team.