When it comes to running a business, every decision counts, especially those that involve significant costs. One common question we hear from clients is, “Should I buy a company car through the business?” As with most things in tax and accounting, the answer depends on a variety of factors like your company structure, the type of vehicle, how it’s used, and your tax position. In this blog, we’ll break down the key considerations for business owners thinking about buying a company car.
1. Company car vs personal car – what’s the difference?
If a business buys a car and provides it to an employee (including directors), it becomes a company car. The key benefit? The company typically pays for the car and running costs. The key downside? The employee pays Benefit-in-Kind (BIK) tax for the personal use of that car.
Alternatively, you can purchase a car personally and claim business mileage from your company. This route tends to be simpler from a tax perspective and avoids BIK charges but may not be the most cost-effective if you’re covering high business mileage or looking to buy an electric vehicle through your company.
2. Understanding Benefit-in-Kind (BIK) tax
BIK tax is applied when an employee receives a benefit, like a company car, that has personal use. It’s calculated based on several factors:
- The list price of the car when new
- The CO₂ emissions,
- The fuel type,
- Whether the company also pays for fuel.
The good news for 2025/26 is that electric vehicles (EVs) still enjoy very favourable BIK rates. For this tax year, fully electric cars are taxed at a low 3% rate, making them one of the most tax-efficient options available.
3. Is electric vehicles the smart option?
Even with BIK rates rising slightly, electric vehicles remain the most tax-efficient choice for company cars. They continue to attract the lowest taxable benefits, offer generous capital allowances, and are exempt from many other charges traditionally applied to higher-emission cars.
Beyond tax, electric vehicles are becoming a more practical and popular choice. Charging infrastructure across the UK has improved significantly, and many businesses now support home charging solutions for employees. From both an environmental and financial point of view, EVs continue to lead the way.
4. Capital allowances – tax relief on the purchase
When your company buys a car, you may be able to claim capital allowances to reduce your Corporation Tax bill. Fully electric vehicles qualify for 100% first-year allowance, meaning you can deduct the entire cost of the vehicle from your profits in the year of purchase. This can significantly reduce your Corporation Tax bill.
Cars with higher emissions, however, are subject to lower rates of relief and must be written down over several years. If tax efficiency is a priority, choosing a zero-emission vehicle makes a big difference.
5. VAT and Running Costs
In most cases, VAT on the purchase of a car can’t be reclaimed unless the car is used exclusively for business, which is difficult to prove. However, you can usually reclaim some VAT on leased cars and on running costs like fuel and maintenance.
Be mindful, though, if the company pays for private fuel use, this can trigger an additional tax charge. Many companies now avoid this by asking employees to reimburse any personal fuel costs or by not covering fuel at all.
6. What about sole traders and partnerships?
If you’re self-employed or in a partnership, the rules are different. You won’t pay BIK tax, but you also can’t claim the full cost of the vehicle unless it’s used purely for business. In most cases, sole traders either claim a proportion of the car’s running costs or use HMRC’s simplified mileage rates to cover business use.
Both methods can be effective, but record-keeping is key, particularly if you’re using a personal vehicle for both business and private travel.
7. Leasing and salary sacrifice schemes
An increasingly popular option is leasing a car through the company using a salary sacrifice arrangement. This involves employees giving up part of their salary in exchange for a company-provided electric vehicle. Because of the low BIK on EVs, this can result in considerable tax and National Insurance savings for both employee and employer.
While these schemes are more complex to set up, they can offer excellent value, especially for businesses looking to offer staff benefits while managing costs.
8. Is buying a company car right for your business?
The decision to buy a company car depends on several factors, including how much the car will be used for business purposes, your company’s structure, and whether the car is electric or petrol/diesel. Electric vehicles remain the most tax-efficient option for 2025/26, but the gap is narrowing.
For some businesses, purchasing or leasing through the company makes sense. For others, especially sole traders or directors with minimal business mileage, claiming mileage on a personal car might still be more cost-effective.
We work closely with clients to evaluate their specific circumstances and find the most tax-efficient path forward. If you’re thinking about buying a company car, or switching to electric, speak to an accountant before you make your decision.
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