How do company cars work? An essential guide for business owners

Thinking of buying a company car but unsure of the tax implications? What about the ownership and would there be use restrictions? At Palm Accountancy we are here to help and have answered a few of the frequently asked questions about company cars here.

The top three questions asked most frequently by limited companies considering company cars are:

1. Should we buy or lease the car?

Whether you should purchase or lease a car through your limited company depends on several key factors: tax efficiency, CO₂ emissions, your usage (business vs personal), cash flow, and whether you want to own the car.

Tax Efficiency:
Company cars used personally are subject to Benefit-in-Kind (BiK) tax, which can be costly for high-emission vehicles. Electric cars, however, are far more tax-efficient with a BiK rate of just 3%.

CO₂ Emissions:
Higher CO₂ emissions mean higher BiK tax and a 15% disallowance on lease costs. Zero-emission vehicles offer the best tax treatment.

Business vs Personal Use:
If the car is used solely for business, there’s no BiK tax. But for any personal use, even occasional, BiK applies — making personal ownership with mileage claims potentially more tax-efficient.

Cash Flow:
Leasing spreads the cost and preserves cash flow, while buying requires more upfront investment but may save money long-term if you keep the vehicle.

Ownership:
If you want to own the car, buying is the better option. Leasing offers flexibility and is ideal if you plan to change cars frequently.

2. What are the benefits of electric vs petrol/diesel?

Electric vehicles (EVs) are far more tax-efficient than petrol or diesel cars when used through a limited company. They benefit from a 3% Benefit-in-Kind (BiK) rate, 100% first-year allowances, and lower running costs. In contrast, petrol and diesel cars often face high BiK charges (up to 37%) and slower tax relief, especially if emissions exceed 50g/km. If tax savings and environmental impact matter, EVs are the clear winner.

3. Is it best to buy new or used?

When deciding between a new or used vehicle for your business, consider both tax and practical factors. New cars, especially electric ones, may qualify for 100% first-year allowances and offer lower maintenance costs, but they depreciate quickly. Used cars are often cheaper upfront but don’t qualify for the same tax reliefs and may come with higher running costs. For maximum tax efficiency, a new electric vehicle used primarily for business is usually the best choice.

If you’re a sole trader or ordinary partner and use you car for both business and personal reasons, you’ll need to calculate your tax claim based on the proportion of business use versus what you use the car for personally. If you use traditional accounting (recording income and expenses by the date you invoiced or were billed) you can claim the cost of a car as a capital allowance, offset from profits before tax. However, If you use cash-basis accounting (record your income and expenses by the date you were paid), you can only claim a car as a capital allowance if you’re not using simplified expenses with the mileage allowance. Sole traders claim for capital allowances via their Self Assessment tax return and, as with Limited Companies, this rate depends on the CO₂ emissions of the car.

Instead of providing company cars, a business may provide employees with a car allowance, which is a fixed cash payment added to their salary to cover car-related costs. This allowance is treated as taxable income for the employee, but they have freedom to choose and own their own car.

When travel is still necessary for business, an alternative to a company car is the use of a personally owned or leased car. This would remove any restrictions on personal use and avoids benefit-in-kind tax, but VAT and capital allowances can’t be reclaimed. What you can claim for any business journeys are mileage expenses: HMRC allows 45p per mile for the first 10,000 miles and 25p per mile thereafter.

Unlike cars, business vans can be included in the Annual Investment Allowance.