How much tax relief can you claim if buying a new or used car as a sole trader?

UberTiger

UberTiger

UberTiger

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If you're registered as a sole trader, what kind of tax relief can you get from buying either a new or used car?

I've just been looking at the hmrc website and I'm a little confused.

From what I've read you can claim for a car under 'capital allowances'.

To work out your capital allowances, you need to write down your allowances.

Edit: I've just checked the Which? website and it explains it a little clearer.

Self-employed: capital expenditure regime
Expenditure over £500,000 is dealt with not under the annual investment allowance but by the 'capital expenditure regime'.

With capital allowances, the general rule is that each year you can claim tax relief on up to 18% of the cost of the capital item. This is sometimes known as the writing down allowance (WDA).

Example
If you bought equipment costing £10,000 above the £500,000 annual investment allowance for your business you could claim tax relief on 18% of its cost in the first year – £1,800.

So in the 2013/14 tax year, this could save you £324 (18% x £1,800).

That leaves £8,200 of the cost still to be written off, so the next year you could claim tax relief on 18% x £8,200 (£1,476), and so on each year.

Cars are treated under these rules, rather than counting towards your AIA. If the car has carbon emissions below a certain threshold, you will be able to claim 100% of the cost, under a 'first year allowance'. If the emissions are above the threshold you will be able to claim 18% of the cost per year.

If the vehicle is used exclusively for business, the whole cost is taken into account. If it is partially used for private mileage, the eligible sum is reduced pro rata.
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So if I bought a car, be it new or used is above the emission threshold then I could only claim 18% of the value of the car every year? So the whole car would be accounted for via tax relief in a little over 5 years?

And if the car is under the emissions threshold the entire value of the car could be claimed as tax relief in one year? No matter if it's new or used?

I'm slightly unsure about the sentence in the quote from Which about being 10K above the 500K AIA. My business wouldn't be investing anywhere near that much. Car's can't be claimed on AIA according to the website and must go under capital allowances, so maybe I can just ignore that?

Next, if the car is being used for business and pleasure, how is that calculated?

Say I drive 5k, miles a year, 4k miles of which is for business. Does that mean I could only claim for 80% of the value of the car and would I have to log all my miles?
 
UberTiger said:
So if I bought a car, be it new or used is above the emission threshold then I could only claim 18% of the value of the car every year?
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Correct, subject to the provisions regarding personal and business use.

So the whole car would be accounted for via tax relief in a little over 5 years?
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No, it isn't 18% of the purchase price, it's 18% of the written down value.

So, you spend £10k. You can claim WDA of £1800 in first year. The car now has a written down value of £8200. In year 2 you can thus claim a WDA of £1476 which will give the vehicle a written down value of £6724, etc etc.

And if the car is under the emissions threshold the entire value of the car could be claimed as tax relief in one year? No matter if it's new or used?

Next, if the car is being used for business and pleasure, how is that calculated?

Say I drive 5k, miles a year, 4k miles of which is for business. Does that mean I could only claim for 80% of the value of the car and would I have to log all my miles?
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That is correct - but in practice a mileage log is unlikely to be asked for.

March might be a good time to buy a car ;)
 
Every time I ask my accountant about buying a car through my business I just get confused and stick to buying privately and claiming fuel allowance. :D
 
Pick up style trucks seem very popular in the contracting community as well. Especially ones you can get your family and weekly shopping in as well.
 
UberTiger said:
Next, if the car is being used for business and pleasure, how is that calculated?

Say I drive 5k, miles a year, 4k miles of which is for business. Does that mean I could only claim for 80% of the value of the car and would I have to log all my miles?
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[TW]Fox;27518452 said:
So, you spend £10k. You can claim WDA of £1800 in first year. The car now has a written down value of £8200. In year 2 you can thus claim a WDA of £1476 which will give the vehicle a written down value of £6724, etc etc.
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Fox is correct on the WDA calculation. When there is a private/business split, you still calculate it the same way, so a 10k car will still be written down in value by 1800 in the first year, to have a balance if 8200 carried forward. You then only claim the business % of the 1800 as your WDA.

Yes, ignore the part about the current 500,000 AIA allowance, your car won't be eligible for AIA, only WDA and as you say you won't be purchasing that amount of assets anyway! Though the AIA is being reduced to 25,000 again in 2016.
 
Thanks for the replies guys!

I understand the WDA now, I misread it originally but it makes sense now.

For those recommending vans and trucks, a sole trader isn't necessarily a tradesman ;)

The car is used to commute to where to work and occasionally pick up supplies, plus no family. So a normal car is what I was thinking of.

Instead of writing it down 18% per year over a period of years and wanted to file it under first year allowances is this be how it would pan out instead:

So as an example. Say someone was to take in £60k, with £20k worth of expenses.

That leaves £40k worth of profit resulting in £6k of tax to be paid according to this website and the following figures:

http://www.employedandselfemployed.co.uk/self-employed-tax-calculator

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Does that mean if the car is used for business miles 80% of the time you could divert £4,800 worth of that tax bill into a low emissions car and only have to pay £1,200 as the tax bill?

This would have to be done not by claiming simplified expenses, but via capital allowances - first year allowance

EDIT: I think I've got that completely wrong.

If you buy an asset that qualifies for first year allowances you can deduct the full cost from your profits before tax.
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So you actually deduct the cost of the car from profits before tax above, which is £40k?

So lets say it's a £15k car.

This results in a new profit after paying for the car of £40k - £15k = £25k.

So essentially you're just expensing the entire car as a business cost to create a new annual outgoings of £20k + £15k car = £35k?

So using the calculator again with the new figure shows a £3k tax bill instead.

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So effectively half, and £3k of the original tax bill has now been contributed to the cost of the new car, effectively costing me then £12k out of my own pocket?

If it was only used 80% for business would the tax contribution actually be 80% x £3,000 = £2,400, resulting in the car costing £12,600 with a £3,600 tax bill?
 
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Ahhh I see, thanks :)
I would have thought they'd be more emissions hungry and therefore less favourable.

After reading blueboy's post in the lease thread this may have all gone to pot anyway.

Are you not able to claim business miles as your journey to and from a place of work? As that's what nearly all of my miles are at the moment. I guess I'd then only be able to claim simplified expenses on a per mile basis.

At approx 4000 miles, that's 4,000 x £0.45 = £1,800 expenses. Of which the knock on tax reduction would be pretty small, wouldn't it?
 
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Vans and pick up trucks aren't cars so they don't follow the same tax rules. You could in fact claim AIA on them.
 
Also in your post ~9 you seem to be claiming the whole cost of the car in 1 year again....which you can only do if it's emissions are under 95g/km or electric and brand new under FYA (First year allowance, not AIA) - I think this changes after Mar 15 or has it been extended again?

Between 95g and 130g (or under 95g and second hand) you can only claim WDA at 18%

Over 130g you can only claim WDA (special pool) at 8%
 
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Just to note, you need to keep track of WDA and the balance remaining as you will need this when you sell the car. There will be a capital gain/loss.
 
Right. Initially I was trying to figure what the various savings would be buying any car and claiming for it all in a single year, claiming FYA seeing as I'm not sure how long I'll be involved with this particular business.

I read so many different articles about tax yesterday it kind of melted my mind...looking into it now it seems a lot of the cars I'm looking at would be in the 95-130 range so that writes off the FYA on a used car. Audi A3, BMW 1 series etc.

At this point, I guess I'm just trying to figure out how much you could actually potentially save on tax using FYA on a new car vs WDA 18% year on year for new or second hand car.

EDIT: Good to know Kemit, thanks.
 
xs2man said:
Just get a Porsche Panamera S Hybrid, and right it off in the first year. Job done, lol.
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:p

I wish, there's so many gorgeous cars in the area that I'm living now. I feel like the poor relation driving around in my 15 year old Citroen Saxo, even though it's quite a handy runaround car. Does my head in on long motorway runs though.

Theres someone around the corner from me with a Hybrid Cadillac Escalade. I'm pretty sure it's bigger than my entire flat :D

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