Buying a car through a limited company: how the tax works.

What happens when your company buys a car

A car bought by the company is a fixed asset. It goes on the balance sheet at cost. It does not go through the profit and loss account as a single expense in the year you buy it.

Tax relief for the purchase comes through capital allowances instead. Running costs paid by the company, such as insurance, servicing and repairs, are normal business expenses.

The other side of the deal is personal tax. If a director or employee can use the car for private journeys, that use is a taxable benefit. The company reports it and pays employer National Insurance on it. The driver pays income tax on it.

So there are always two questions. How much relief does the company get? And how much tax does the driver pay for having the car?

Capital allowances on company cars

For cars bought from April 2021, the allowance depends on the car's CO2 emissions and whether it is new.

• New, unused zero-emission cars. A 100% first-year allowance. The company can deduct the full cost from its profits in the year of purchase.
• CO2 of 50g/km or less, including second-hand electric cars. These go into the main rate pool. The main rate is 14% a year from April 2026. It was 18% before that.
• CO2 over 50g/km. These go into the special rate pool at 6% a year.

The pool rates are writing down allowances. They apply to the reducing balance each year, not the original price. A hypothetical £30,000 petrol car in the special rate pool gives an allowance of £1,800 in the first year. The same car with emissions of 50g/km or less would give £4,200 at 14%.

That gap is why the electric car is usually where the tax case for a company car starts. Second-hand electric cars do not get the first-year allowance, so check whether the car is new before you plan around it.

Benefit in kind: the tax on private use

If the car is available for private use, the driver has a company car benefit. Commuting between home and a normal workplace counts as private use.

The benefit value is the car's list price multiplied by an appropriate percentage. List price is the price when the car was new, not what the company paid. The percentage depends on CO2 emissions and, for low-emission hybrids, the electric range.

For 2026/27:

• Zero-emission cars: 4%.
• Cars with 1 to 50g/km: a sliding scale based on the car's electric-only range.
• Higher-emission cars: the percentage rises with CO2 up to a maximum of 37%.
• Diesel cars: a 4% supplement, capped at the 37% maximum. Diesels certified to the RDE2 standard are exempt from the supplement.

The driver pays income tax on the benefit value at their own rate. The company pays Class 1A National Insurance on it at 15%.

Two hypothetical examples

The benefit is reduced if the car is unavailable for part of the year, for example because of a mechanical fault. HMRC's calculator takes this into account.

Fuel for private journeys

If the company pays for fuel used on private journeys, there is a separate car fuel benefit. For 2026/27 it is £29,200 multiplied by the car's appropriate percentage. At 37%, that is £10,804 of extra taxable benefit, and £1,620.60 of Class 1A for the company.

There is no fuel benefit if the driver pays for private fuel themselves, or repays the company in full for it. That repayment needs to be recorded properly in the books.

Electricity is treated differently. If the company owns or hires a fully electric car, it does not have to report or pay anything on charging it.

When there is no benefit in kind

Some cars are exempt. The main cases are:

• Business-only cars. The company tells the driver not to use the car privately, and checks that they do not.
• Pool cars. Shared by employees for business, normally kept on the company's premises, and not used privately.
• Adapted cars for disabled employees, where the only private use is home-to-work travel or travel to work-related training.

A car kept at the director's home and used for the school run will not meet these tests. Be realistic about how the car will be used before relying on an exemption.

VAT on buying, leasing and running a car

As a general rule, a VAT-registered company cannot reclaim the VAT on buying a car. The main exceptions are cars bought as stock by dealers, cars used mainly as taxis, for driving instruction or for self-drive hire, and cars used exclusively for business and not available for private use.

If the company leases a car used for business, it can usually reclaim 50% of the VAT on the lease rentals. The other 50% is blocked to reflect private use.

Running costs are more generous. VAT on repairs and maintenance paid for by the company can normally be reclaimed, even where the car is also used privately. For fuel, the company can choose between reclaiming VAT and applying the fuel scale charge, keeping detailed mileage records to separate business from private use, or claiming no VAT on fuel at all.

Vans follow different rules. A vehicle with a payload of one tonne or more is not treated as a car for VAT. Converting a van into a car can mean VAT to pay if VAT was reclaimed on the van. If you need help with the VAT side, see our guide to reclaiming VAT.

Leasing instead of buying

Lease rentals are a running cost, so the company deducts them as it pays them rather than through capital allowances. For cars with CO2 emissions over 50g/km, 15% of the hire cost is disallowed for corporation tax. Cars at 50g/km or less have no such restriction.

Benefit in kind works the same way for a leased car as for a bought one. It is based on the list price and the appropriate percentage, not on the lease payments.

The alternative: keep the car in your own name

Many directors keep the car personally and claim mileage from the company for business journeys. The approved mileage rates for 2026/27 are 55p a mile for the first 10,000 business miles in the tax year and 25p a mile after that.

Payments below those rates do not need to be reported to HMRC and are not taxed. Commuting to a permanent workplace is not a business journey. Our guide to how the mileage allowance works covers this in more detail.

As a rough rule, a new electric car often works well inside the company because of the 100% allowance and the 4% benefit rate. A petrol or diesel car with high emissions often costs more in benefit-in-kind tax than it saves, and mileage claims on a private car may come out ahead. Run the numbers for your own car and income before you decide. If the figures are close, an accountant can model both routes.

Vans are taxed differently

A van is not a car for benefit-in-kind purposes. Where a company van is available for private use, there is a flat van benefit charge of £4,170 for 2026/27, and a flat van fuel charge of £798 if the company pays for private fuel.

What your bookkeeping needs to record

A company car touches several parts of the books. Each one needs to be right for the year-end accounts, the corporation tax return and the benefits reporting.

• The purchase. Posted to fixed assets, not motor expenses, with the invoice kept. If finance is involved, the loan or hire purchase balance and its interest are recorded separately.
• The car's details. List price, CO2 figure, fuel type, the date it was first made available and who drives it. These drive the benefit-in-kind calculation.
• Running costs. Insurance, road tax, servicing, repairs and fuel coded consistently, with the VAT treatment applied correctly on each one.
• Driver repayments. Any payments the driver makes for private use or private fuel, with dates.
• Benefits reporting. Expenses and benefits for the tax year are reported to HMRC by 6 July, with a copy to the employee by the same date. Class 1A is paid by 22 July if paid electronically, or 19 July by cheque.

Errors here tend to surface late. A car posted to motor expenses, or a lease with VAT reclaimed in full, is usually found when the accounts are prepared, months after the event. Keeping the books current means the question gets asked when the invoice arrives. For more on what counts as a deductible cost, see allowable expenses for limited companies.