Learn how buying a company car through your limited company can offer tax benefits, professional advantages, and cost savings. Compare purchase, lease, and financing options to find the best fit for your business.
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As a business owner, keeping your business moving can sometimes be a very literal proposition. That’s why it can be so handy to purchase a company car for dedicated business-use.
A company car is defined as any vehicle (or as HMRC poetically puts it, “any mechanically propelled road vehicle”) purchased or leased under a business’s name. The reasons a company would buy a car are many: for client visits, for deliveries, to move goods or to offer as an employee benefit.
Company cars have plenty of benefits and, as a result, limited companies often invest in them. But there are a few things to consider before you decide whether buying a vehicle through your business is the right call.
In this article, we’ll explore the advantages, disadvantages, and key considerations when purchasing a company vehicle (or a fleet of vehicles) in the UK. Plus, we’ll offer some insight into funding your purchase and using finance.
From tax relief to bolstering your business’ image, here are the main advantages of buying a car through your limited company:
When you buy a car through your limited company, certain costs become deductible business expenses. These include maintenance, insurance, and road tax. These deductions reduce your corporation tax (CT) liability, which makes the initial purchase more affordable over time.
In the UK, businesses can claim capital allowances on company cars based on their CO₂ emissions, allowing them to deduct a portion of the vehicle's cost from their taxable profits. The current allowances are:
100% first-year allowance: Available for new and unused electric cars with zero CO₂ emissions. This means businesses can deduct the entire cost of the car in the year of purchase.
The UK government has extended the availability of the 100% First-Year Allowance for zero-emission cars. This allowance will now be available for expenditures incurred on or after 1 April 2025 and it will expire on 31 March 2026 for Corporation Tax purposes.
18% writing down allowance: Applies to cars with CO₂ emissions between 1-50g/km. You can deduct 18% of the car's cost from your profits each year on a reducing balance basis (i.e. instead of deducting the same amount each year, you deduct a percentage of the remaining value).
6% writing down allowance: For cars emitting over 50g/km CO₂, you can deduct 6% of the car's cost annually on a reducing balance basis.
If the car is used exclusively for business purposes, you can reclaim VAT on the company car. However, for cars with any personal use, VAT recovery is typically not permitted.
A less tangible benefit, but company cars may be important from a branding perspective. A company-branded car can enhance your business’s professional image and visibility. It’s particularly valuable for businesses where client impressions matter.
Buying a car through your limited company can have financial and tax advantages, but it also comes with drawbacks. Here are some key factors to consider before making a decision:
Firstly, if the car is available for personal use, it becomes a taxable benefit. The BiK tax is calculated based on the car’s value, CO₂ emissions, and the employee’s income tax rate. For example, a car worth £25,000 with a BIK rate of 30% results in a taxable value of £7,500. For a 20% taxpayer, this equals £1,500 in annual BIK tax.
You may also be subject to higher insurance premiums. Company cars often attract higher insurance premiums compared to personal cars due to their classification and potential usage patterns.
After purchasing a car, its value depreciates over time, which can reduce your company’s overall asset value and make it less attractive to lenders or investors.
The UK government is actively encouraging businesses to adopt electric and low-emission vehicles by offering various tax incentives and benefits. As such, electric and low-emission cars offer significant tax advantages for businesses:
For company cars, there are several options beyond simply purchasing a vehicle outright. These alternatives can help reduce costs, increase flexibility, or address specific tax considerations.
A finance lease for a car might be an attractive option if you’d like to avoid the long-term depreciation of owning a vehicle. Instead of buying, you pay a fixed monthly amount to use the vehicle for a set period (typically 2-4 years).
Pros of leasing:
Cons of leasing:
Another alternative to buying is the classic mileage reimbursement. If your employees or directors use their cars for business purposes, you reimburse them for the mileage incurred.
HMRC lets you pay a tax-free mileage rate for business travel. Currently, the approved rates are:
This approach can be a cost-effective solution if your team doesn’t need company cars full-time. But, like commitment to HMRC, it’s important to track mileage accurately.
Pros of mileage reimbursement:
Cons of mileage reimbursement:
Generally speaking, there are three steps to consider when you’re buying a car through a limited company.
The first step when buying a company car is, unsurprisingly, picking the right vehicle. Your choice affects the tax benefits you can claim, as well as the car’s suitability for business use.
Consider the following:
Once you’ve selected the right car, you’ll need to decide how to finance the purchase. There are several options to consider:
An iwoca Flexi-Loan works like a credit card. You get a credit limit, and you can draw down money as needed. It’s yours to use as you see fit, and there are no fees for early repayment.
To ensure the process is compliant with tax laws and regulations, you’ll need to complete several admin steps:
There are three big reasons why a company car might not be worth it for you and your business. They are:
If these don’t apply, then buying a car through your limited company might be a great step. It can offer tax savings, professional advantages, and eco-benefits (especially if you choose a low-emission or electric vehicle).
If you’re considering a company car, take the time to calculate the costs and evaluate your needs carefully. Whether you choose to buy outright, lease, or explore flexible financing options, make sure your decision supports your business’s financial and operational goals.
Want to buy a company car through your limited company or expand your fleet of vehicles? Find out how an iwoca Flexi-Loan can help by visiting our website.
VAT can only be reclaimed if the car is used exclusively for business purposes. For cars for personal use, VAT recovery isn’t allowed.
BIK tax is a charge on personal use of company assets, calculated based on the car’s value, CO2 emissions, and the taxpayer’s income tax rate.
Leasing avoids depreciation concerns but limits capital allowance claims. Buying offers tax benefits but requires higher upfront costs.
Yes, electric cars benefit from lower BiK rates, full first-year capital allowances, and other eco-incentives.
Yes, you must report it on a P11D form and calculate any applicable BIK tax.
Instead of an upfront purchase, consider hire purchase, leasing, or a flexible business loan. Hire purchase spreads costs over time, giving you ownership at the end. Leasing keeps payments predictable while avoiding depreciation risks. Alternatively, a flexible loan, like an iwoca Flexi-Loan, lets you borrow what you need and repay early with no fees, ensuring your cash flow stays healthy.
