Can I claim tax back on my car finance?
When you’re running your own business, every penny counts. That’s why it’s important to know where you stand when it comes to tax deductible expenses (“Alexa, call HMRC”).
The costs of car ownership can quickly add up; not only do you need to cover the cost of the car (either buying outright or financed with monthly repayments), but you’ll also need to pay for the insurance, repairs, fuel, parking charges, fluffy dice - the list goes on.
Thankfully, if you use your car for business, you can claim some of these costs back. You might even be able to reduce your income or corporation tax contributions.
Read on to learn more about claiming tax on your car finance payments and more:
Can I claim back tax on my car finance payments?
Whether you own a limited company or act as a sole trader, running your business can come with a lot of hidden expenses. From investing in equipment, office space, and stationery to heading up and down the motorway to attend client meetings or broker that all-important partnership.
Did you know that you can claim some of these expenses back?
If you use your car for work, your car finance payments, and the costs that come with owning a car like fuel and parking fees, could be tax deductible.
The exact amount you can claim will depend on factors ranging from your overall taxable income and the way you manage your accounts to when you bought the car, how you use it, and what its CO2 emissions look like (another great reason to go green).
Consulting a tax professional can help you understand exactly what you can and can’t claim. They’ll also likely advise you to keep in-depth records of everything you spend on your car for work, just in case.
What can I include in my tax return?
When January rolls around and you’re preparing to file your annual tax return, the way you include your car finance and car-related costs will depend on the type of accounting you do.
If you use traditional accounting and have bought a car purely for business use or for one of your employees to drive at work, you can claim this as a capital allowance.
On the other hand, if you use cash basis accounting, you can also claim the car as a capital allowance but you’ll need to subtract a portion of the car's value from your business profits before calculating the tax due.
Keep in mind that record keeping can make tax season a lot less stressful. Take note of each time the car is being used for business and when it’s being used for your own personal errands. You’ll need to monitor the number of miles you drive as well as any payments you make towards your insurance, car maintenance, and other costs to ensure your claim is 100% accurate.
What counts as a business expense?
A business expense is typically anything that you have to pay for your business to run effectively. This includes any purchases you wouldn’t make or money you wouldn’t spend if it weren’t for your business.
For example, travelling to attend a business meeting or buying a new laptop for work can count as business expenses.
These expenses will then be deducted from your annual income, potentially reducing the amount of tax you must pay that year.
What can I claim tax back on if I’m self-employed?
As a self-employed person, you can claim tax back on several business expenses related to your car.
This can include all or a percentage of:
- Your vehicle insurance
- Any repairs
- Fuel
- Parking
- Hire car charges
- Vehicle licence fees
- Breakdown cover
If you also use your car for personal trips, you won’t be able to claim back everything you’ve spent, but you can work out a percentage split based on the time spent driving for work and the time spent on the road for fun. You also can’t claim for any fines or penalty charges you may incur whilst commuting between home and your normal place of work.
When it comes to filing your expenses, you can either work out a percentage of each individual cost or choose to submit simplified expenses. This will give you a flat rate to claim based on the miles you’ve covered rather than breaking it down into the different components like fuel, insurance, and maintenance.
FAQs claiming tax back on car finance
Is it better to have a company car or car allowance?
There are pros and cons to both company cars and car allowances, and the right option for you will always be based on your individual circumstances and preferences.
With a company car, your employer will buy a car for you to use. As you don’t have to buy the car yourself, you won’t have to worry about it losing value or being tied into a finance agreement. You might also benefit from lower Benefit in Kind taxation, especially if the car has low or zero emissions.
However, you’re unlikely to be able to choose your company car, you won’t ever own it, and you might need to pay an additional fuel benefit if you use it to drive in your personal life too.
A car allowance will typically be added onto your annual salary so that you can buy or lease a car yourself. That means you’re free to choose your dream car (if it’s in budget) and how you pay for it - you could even choose a lease if you like that flexibility.
On the flip side, you’ll be personally liable for making the car finance repayments and covering any running costs. You’ll also likely pay tax on the allowance as it’ll be added to your monthly salary and could push you into a higher tax bracket.
Does car allowance include fuel?
If your work offers a car allowance for you to use to pay for a car, the other costs it covers will depend on the company’s policy. Some will cover all the costs associated with your business travel including fuel, insurance, and any repairs. Others will allow you to claim back a certain amount per mile, especially if you also use your car in your personal life.
Can I claim car lease payments on tax if I’m self-employed?
As a self-employed person, car leases can be tax deductible in certain circumstances. You’ll also need to subtract 15% of your costs from the claim if the car’s tax emissions are higher than 50g/km.
If you’re also VAT registered, you could claim up to 100% of the VAT paid on your monthly lease and maintenance package as long as your car is only for business use. If you also drive it in your off time, you could claim up to 50% VAT.
Can I put my car through my limited company?
When buying through the business, you could claim your car finance payments and any interest due. Your company accounts will also need to pay for the car's running costs such as insurance and tax, which are deductible from Corporation Tax. If you do choose this approach, keep in mind that cars with lower emissions often qualify for highest allowances.
However, if you plan to use your car for personal reasons most of the time, you might want to consider another option as the BiK tax due might outweigh the capital allowance gains.
How much is the capital allowance on a car?
The exact capital allowance on a car bought for business use will depend on when you bought it and its CO2 emissions.
- If you bought the car after April 2021, you could claim the full value of the car as 100% first year allowances for a new and unused car with zero emissions (or an electric car).
- You can claim 18% of the car’s value if it’s a second-hand electric car or a new or second-hand car with CO2 emissions of 50g/km or less.
- You can claim 6% of the car’s value if it’s new or second-hand with more than 50g/km in CO2 emissions.
Cars bought between April 2018 and April 2021 are slightly different.
- You can claim the full value of the car as 100% first year allowances if it’s new, unused, and the CO2 emissions are 50g/km or less (or it’s electric).
- You can claim 18% of the car’s value if it’s a second-hand electric car or a new or second-hand car with CO2 emissions of 110g/km or less.
- You can claim 6% of the car’s value if it’s new or second-hand with more than 110g/km in CO2 emissions.
