Purchasing a car via your limited company might seem like an ideal way to save on tax. However, it can be more tax-efficient to purchase the car privately and then claim for mileage. In this blog, we’ll explore why this is so, and how to make a claim.
Reasons not to buy a car through your business
The main issue is that as a director you are classed as an employee. As a result, you must pay Benefit in Kind (BIK) tax for the private use of a car owned by your company. Your company must also pay employer’s National Insurance (NI) on the value of this benefit.
While the business can reclaim a portion of running costs and some of the purchase cost, reducing the corporation tax it pays, the employer’s NI and BIK tax on company cars means that it’s mostly more tax efficient for a company director to lease or buy privately and then claim mileage.
BIK tax and employer’s NI applies to lease car too. As a result, even if a business leases a car instead of buying it, claiming business mileage is typically the best option.
How to claim business mileage
To claim business mileage, you first lease or buy a car privately. When driving for business you must keep a log of all your trips. You will note down the number of miles that you cover in your car when travelling for business purposes. Any journeys to training days, conferences, clients, suppliers and even your company accountant are classed as business travel. However, your daily commute to your business premises does not. You’ll find useful apps you can download that are designed to track your mileage, however, a simple spreadsheet listing all your business trips and the distance covered is also suitable.
Next, you must multiply the number of miles you’ve travelled on business by the claim rates established by HMRC for business mileage. Your business then reimburses you for the total amount before putting it through its accounts, listing it as a business expense, effectively reducing its profits and as a result, the size of its corporation tax bill. When you select this option, there is no BIK tax to pay.
If you have a tax question or would like further advice before buying a car through your Aberdeen business, at A2Z Accounting, we can help.
Get in touch now for all your accounting needs.