Given the costs involved and potential tax savings, asking how you can buy a car through your business as a sole trader is pretty reasonable. After all, when you work for yourself the more expenses you can claim the less tax you pay.
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 guide is for self-employed and sole traders. Different rules apply if you have a Limited Company.
Table of contents
1. Buying a Car through Your 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.
2. Personal Use of a Car
First thing first, you must remember that when it comes to self-employment taxes, you cannot claim for buying personal items through your business. 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 ever investigates 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.
3. Sole Trader Car Purchase Options
If you are self-employed and buying a car, then there are 4 main ways you can expense the cost:
- Claim mileage
- Buying a car for cash
- Hire purchase
- Claim lease payments
Let’s look at each one:
4. 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 the self-employed mileage allowance).
The fuel you can claim per mile is currently:
|Type of Vehicle||Flat rate per mile with simplified expenses|
|Cars and goods vehicles first 10,000 miles||45p|
|Cars and goods vehicles after 10,000 miles||25p|
You’ll need to record the miles you do, keeping a detailed log of where you have travelled.
If you choose to claim self-employed mileage allowance you cannot claim for the cost of your car and car expenses. 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.
5. Buy a Car for Cash
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 on your car 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% for 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 more about capital allowances in this guide and check what you are entitled to.
6. Lease a Car
A sole trader car lease is another option for buying a car through your business if you don’t want to pay cash to own it outright. In this case, you’ll claim for your self-employed car lease payment against your taxes.
You can also deduct for sole trader car expenses like fuel, servicing, insurance and repairs against your taxes. Again, only claim for your business use percentage for these expenses.
7. 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. Again, only claim for your business use percentage for these expenses.
8. Wrapping Up
Whichever method you choose for your sole trader car purchase, you have to stick with it. It cannot be changed partway through the time you own your car. So make sure you choose the method that is right for you at the point that you purchase your car. And don’t forget you can only ever claim the business portion of any costs associated with your car.
Electric cars are an environmentally friendly way of running a business vehicle, read about the pros and cons of an electric vehicle in this guide.