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Company Cars for Limited Company Directors: Tax Consequences Explained

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As the director and shareholder of your own limited company, you have flexibility in how you extract value from your business — whether through salary, dividends, or benefits such as a company car. While the idea of driving a car owned by your company can be appealing, it’s crucial to understand the tax consequences before making a decision.


1. The Car as a Benefit in Kind (BIK)


If your limited company provides you with a car that is available for private use (even just one personal journey, yes they are that harsh), HMRC views this as a benefit in kind.


The taxable value depends on the original list price of the car, including VAT and accessories, not the actual purchase price/market value now.


A percentage is applied based on the CO₂ emissions and fuel type. This can range from 2% (for zero-emission cars) up to 37% (for high-emission petrol/diesel cars).


The taxable amount is then subject to income tax at your marginal rate (20%, 40%, or 45%).


Example:

A petrol car with a £30,000 list price and a 30% BIK rate → taxable benefit of £9,000.

If you are a higher-rate taxpayer, the personal tax liability would be £3,600 for that year.


2. Employer (Company) Costs


Your company also pays:


Class 1A National Insurance at 13.8% on the value of the benefit.


Ongoing costs such as insurance, servicing, and road tax (deductible business expenses).


This means both you and your company shoulder tax costs.


3. Electric Vehicles: A Tax-Efficient Option


For directors considering a company car, electric vehicles (EVs) stand out:


The BIK rate is just 2% of the list price until April 2025.


On a £40,000 EV, the taxable benefit is only £800 per year. Even at 40% tax, that’s £320 of personal tax annually.


The company’s Class 1A NIC would be £110.40.


The company can also claim 100% first-year capital allowances on the cost of a new EV, making it deductible from profits.


This makes EVs one of the most tax-efficient perks for limited company directors.


4. Fuel Benefit Trap


If your company pays for private fuel (for a petrol/diesel car), this creates a separate benefit in kind.


The taxable value is based on a fixed multiplier (£27,800 for 2023/24), multiplied by the car’s BIK percentage.


In many cases, this leads to a very high tax charge compared to the actual benefit.


For most directors, it is rarely worth accepting company-paid private fuel unless mileage is extremely high.


5. Alternatives to a Company Car


Instead of providing a car directly through the company, directors may consider:


Owning the car personally and claiming mileage allowance at HMRC rates (45p per mile for the first 10,000 business miles). This is simple, avoids BIK charges, and can be cost-effective.


Car allowance instead of a company car, taxed as salary but leaving you free to choose and fund your own vehicle.


Salary sacrifice EV schemes, which allow you to offset gross salary in exchange for a low-taxed electric company car.


6. Making the Decision


For petrol and diesel cars: a company car is usually tax-inefficient.


For EVs: the tax rules make them highly attractive, particularly for limited company directors.


Always weigh up the personal tax, company tax, and running costs against the benefit of convenience and cash flow.


Conclusion


We think you should avoid if not purchasing electric vehicle.


As always, tailored advice should be sought before making decisions — especially if your company profits, personal income tax band, and driving habits create a more nuanced picture.

 
 
 
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