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Costs and benefits of company cars

Short Answer

Company Cars incur disproportionally large amounts of income tax, whereas the HMRC approved mileage rate of 45p per mile for use of your own car is pretty generous. We recommend sticking to the mileage rate.

Use of your own car for business

Travel costs in a private vehicle to or from a temporary place of work are seen as an allowable expense by HMRC and they allow private vehicles to charge their company a flat rate based on the number of miles travelled.

The rates are:

– First 10,000 miles in a tax year at 45p per mile
– Any miles over 10,000 in a tax year at 25p per mile

So if you drive 12,000 miles between 6 April 2013 and 5 April 2014 (the tax year) you charge your company an expense claim of £4,500 (first 10,000 miles at 45 per mile) + £500 (the final 2,000 miles at 25p per mile) = £5,000.

Other car costs?

The rate of 45p per mile is normally far more than the actual fuel cost of travelling. This is because the mileage rate is deemed to include the extra costs of a car such as insurance, road tax and depreciation. As such no other costs related to the car can be charged to the company.

If you want to charge your company for mileage travelled you don’t have to keep petrol receipts but you must keep a log of all business trips including the distance and mileage travelled.

We’ve prepared a spreadsheet you can use to keep track of this here.

You’ll also need to enter the expense claims into your Xero account through the normal [Expense Claim] functionality, so if you prefer you can record the trip details in the description there. Like this:

Mileage-Expense-Claim


Company Car

Alternatively your company can buy a new car and make this available for your use.

The cost of the car will be spread across five years for Corporation Tax purposes (so a £10,000 car would have a tax deductible expense of £2,000 per year for five years).

However owning a company car through the company means then HMRC will calculate ‘ a ‘benefit charge’ on the use of the vehicle.
Rather than being based on number of miles travelled, the government uses a number of different factors such as the cost of the car and the CO2 emissions of the vehicle. You are also liable for an increased income tax and National insurance charge.

For this reason we have found that in nearly all cases for contractors, it is not beneficial to purchase a company car and it is tax efficient to use a personal car and then claim mileage from the company.