Can I Buy a Car Through my Business as a Sole Trader?

When you work for yourself the more you can expense the less tax you will pay. 

Given the costs involved and potential tax saving, asking if you can buy a car through your business as a sole trader is pretty common.

In this guide, I’ll show you the options available to you to help you decide how and if you can claim your car as an allowable expense.

This post is for self-employed sole traders. Different rules apply if you have a Limited Company.

Can You Buy a Car through my Business as a Sole Trader (Self-Employed)?

Buying a car as a business expense is fairly common practice and within the rules set out by HMRC.

Depending on your line of work, buying a car through your business can be a really tax-efficient decision. But the way you’ll get tax relief will depend on how you pay for the car and its CO2 emissions.

Personal v. Business

First thing first, you must remember you cannot claim for any personal expenses against your taxes. 

That means you’ll only ever be able to claim the business use portion of your car, no matter how you buy it. If HMRC asks you’ll need to show evidence of how you use your car for work purposes.

The easiest way to work out how to split your car between business and personal use is to assign a simple percentage. For example, you may use your car for 80% business and 20% personal. 

This post is for sole traders and self-employed. Different rules apply if you have a Limited Company.

Your Options for Buying a Car Through Your Business as a Sole Trader

There are 4 main ways you can buy a car through your business when you are self-employed:

  1. Claim mileage 
  2. Buy a car
  3. Hire purchase
  4. Claim lease payments

Let’s look at each one:

Claim a Mileage Allowance for using Your Personal Car

If you buy your car personally you can simply claim a fixed amount per mile every time you use it for business reasons (known as mileage allowance payments).

The amount you can claim is currently:

Type of VehicleFlat rate per mile with simplified expenses
Cars and goods vehicles first 10,000 miles45p
Cars and goods vehicles after 10,000 miles25p

You’ll need to record the miles you do, keeping a detailed log of where you have travelled.

If you choose to claim mileage allowance payments you cannot claim for the cost of your car, servicing and insurance. The fixed-rate is set higher than the cost per litre of fuel to cover running costs and wear and tear.

Download my excel business mileage tracker and keep track of where you have been and how much you can expense.

Buy a Car

Another way to buy a car through your business as a sole trader is to pay cash and own it outright.

If you choose this option, you can expense the cost of the business use element of your car.

As a self-employed (sole trader) the way you’ll get tax relief is by using Capital Allowances.

Capital allowances are a way of giving you tax relief on more expensive items, like cars, that you keep for a number of years.

You’ll have to claim for a portion of the car cost, depending on its emissions, using Capital Allowances:

  • up to 50 g/km – 100% first-year allowance
  • 51g/km-110g/km – 18% capital allowances
  • 111g/km or more – 8% capital allowances

If you choose to use this method for your new car, then you can also claim for fuel, servicing, insurance and repairs on your vehicle as tax-deductible expenses.

Here’s an example.

You buy a car for £10,000 and use it for 70% business. The car has emissions of less than 50 g/km.

You can expense the full business amount of the car – £7,000 (£10,000 x 70%) against your taxes in the tax year you buy it.

If the same car had emissions of 120 g/km then you’ll work out the amount you claim as an allowable business expense differently.

Tax Year 1

Cost of car       10,000
Claim 8%              800 ( business use claim on your tax return is £560)
Cost c/fwd         9,200

Tax Year 2

Cost of b/fwd 9,200
Claim 8%              736 ( business use claim on your tax return is £589)
Cost c/fwd        8,464

You’ll then need to keep going year on year until you either sell the car (and need to make a balancing adjustment) or you have claimed for the full amount of the car against your taxes, whichever comes first.

Depending on which car you have in mind the amount you can claim will vary.

Read this on capital allowances and check what you are entitled to.

Lease a Car

Leasing a car is another option for buying a car through your business as a sole trader if you don’t want to pay cash to own it outright.  

In this case, if you’re self-employed you’ll claim for the car lease payment against your taxes. You can also deduct for fuel, servicing, insurance and repairs.

Again, only claim for your business use percentage.

Hire Purchase Agreement

Buying a car via a hire purchase agreement is another way to get yourself a new car.

If you choose HP, then similar to buying a car outright, you can claim capital allowances as well as any finance charges up to £500 associated with the agreement.

Wrapping Up

If you are buying a car for business whichever method you choose, you cannot change it partway through the time you own your car. So make sure you choose the method that is right for you. 

And don’t forget you can only ever claim the business portion of any costs associated with your car.

More on Claiming Business Expenses:

Are Training Costs Tax Deductible?
Claiming for Clothing
Claiming for Food
Allowable Expenses Cheat Sheet

Anita Forrest
About Anita Forrest

Anita is a Chartered Accountant with over a decade of working with small business owners. She is the creator of the ‘Go Self Employed’ website, where she simplifies complicated self-employment topics such as taxes, bookkeeping, banking and insurance.