The cost of running your own car in a business context can be significant, but there are tax efficient ways of covering those costs.
If you are an employee
As an employee, if you undertake business travel, you can receive tax-free reimbursement from your employer. Business travel does not include ‘ordinary commuting’, which is travel from your home to your normal place of work. You may have more than one normal place of work if you regularly visit several locations over an extended period of time.
What constitutes ordinary commuting can become complex, and if you are in doubt you are best seeking advice before claiming reimbursement for such journeys, as any payments received are taxable (as if they were additional salary). The HMRC employment income pages in this area may also be of some help.
As an employee the maximum amounts you may receive for each business mile are set by HMRC – these are known as Approved Mileage Allowance Payment (AMAP) rates, and the current rates are shown here. If you receive more than these amounts, the surplus will be taxable. If you receive less than these amounts, you may be able to claim tax relief for the difference via your self assessment tax return.
Note that as an employee you are not able to claim the specific running costs of your car (such as road fund licence or insurance) as these costs are allowed for within the AMAP rate.
If you run your own limited company and are also employed by the same entity, you do have the option of the company purchasing the car and supplying it to you. This changes both the rates you can receive as reimbursement for business mileage and also introduces a benefit in kind on you as the employee (the company car and fuel). It would allow the running costs of the car to be borne by the company as tax deductible expenses. If you are considering such an option you need to weigh up the cost/benefit equation very carefully, particularly in terms of the tax impacts, and if necessary seek advice.
If you are self employed
In this case, the car will be your own but is also regarded as an asset being used in your business. You have two options for calculating the tax allowable expenses to include in your self assessment return, but both of these require you to keep track (and a record) of your business mileage.
- The first option is to use the AMAP rates as you would do as an employee. As above, if you take this option this is the full amount you can claim; or
- You add up all the running costs of operating the car (fuel, insurance, consumables, parking, tolls, road fund licence, repairs and servicing, MOT, etc) and claim the proportion of the total that relates to business mileage. In this case you therefore must also track your total mileage in each tax year. You can also include capital allowances and the interest element of any repayments of financing taken out to purchase the vehicle in this calculation.
You should select your option carefully (there is no rule that will make one better than the other in all cases) as once you have claimed capital allowances you cannot switch method for that vehicle.