Buying a car through a limited company is one of the most-asked questions UK directors put to their accountant. It can be a brilliant way to save tax. It can also be an expensive mistake. And the answer in 2026 is not quite what it was last year, because the rules have just changed.
The 100% First Year Allowance on brand new electric cars expired on 31 March 2026. Benefit-in-Kind rates on electric vehicles are now rising every year. Class 1A National Insurance went up to 15% in April 2025. Add it all together and the maths is genuinely different now compared to even twelve months ago.
This guide explains exactly how buying a car through a limited company works in the current 2026/27 tax year, what you save, what you pay, and whether it is still worth doing. By the end you will know whether buying a car through a limited company is right for your situation in 2026, and what to ask your accountant before you sign anything.
Can you buy a car through a limited company?
Yes. A UK limited company can buy, finance or lease any car and put it on the balance sheet as a business asset. The company pays for it, the company owns it, and the running costs sit inside the business.
The real question with buying a car through a limited company is not whether you can, but whether you should. The tax treatment depends on three things: how the car is used, what fuel it runs on, and how much it emits. Get those wrong and buying a car through a limited company can cost you more than buying one personally. Get them right and it can save you thousands.
Buying a car through a limited company: how the tax actually works
Three separate taxes come into play, and HMRC sets out the full company car rules in its official guidance on calculating tax on company cars. Understanding all three is the only way to make a sensible decision when buying a car through a limited company.
1. Corporation Tax relief through capital allowances. When the company buys a car, it cannot deduct the full cost in one go. Instead, it claims capital allowances over several years, reducing its Corporation Tax bill. The rate depends on emissions:
- New fully electric cars (zero emissions): 18% writing-down allowance per year, on a reducing balance, from 1 April 2026. The previous 100% First Year Allowance ended on 31 March 2026.
- Cars with emissions of 1 to 50 g/km of CO2: 18% writing-down allowance.
- Cars with emissions above 50 g/km of CO2: 6% writing-down allowance.
2. VAT recovery. VAT on a car purchase can only be reclaimed if the car is used 100% for business with absolutely no private use. Home-to-work commuting counts as private, so most director cars do not qualify. On a lease, you can usually recover 50% of the VAT where there is any business use at all.
3. Benefit-in-Kind (BIK) on the director. If the car is available for any private use, the director pays personal income tax on the benefit, and the company pays Class 1A National Insurance at 15%. We will work through the numbers below.
Electric vs petrol vs diesel: what changed in 2026/27
The single biggest factor in buying a car through a limited company is the type of car you actually buy. The gap between electric and combustion vehicles is still enormous, even after the 100% FYA expired.
Electric cars. Still by far the most tax-efficient choice. The BIK rate is 4% of the list price for 2026/27, rising to 5% in 2027/28. There is no fuel benefit charge because electricity provided by the employer is not treated as fuel for BIK purposes. Running costs and insurance are deductible. Class 1A NIC applies but at 4% of list price, not 30%-plus.
Petrol cars. BIK is based on CO2 emissions, ranging from 15% for cleaner models to a maximum of 37% for the most polluting. A higher rate taxpayer driving a £40,000 petrol car emitting 130 g/km is typically looking at over £4,000 a year in personal income tax on the benefit alone.
Diesel cars. A 4% surcharge applies on top of the standard BIK rate unless the car meets the RDE2 emissions standard. Capped at 37%.
Hybrids. Treated based on CO2 emissions and electric-only range. Plug-in hybrids with longer electric ranges still attract relatively low BIK rates, but they have crept up year on year.
In plain English: buying a car through a limited company in 2026/27 still works very well for electric, works poorly for most petrol and diesel cars unless mileage is high, and works extremely well for pool cars and commercial vehicles, which we will come to.
Benefit-in-Kind: the real cost when buying a car through a limited company
Benefit-in-Kind is the tax most directors get caught by when buying a car through a limited company. It is the value HMRC places on the personal benefit of having a company car available, and it is charged whether you use the car for personal reasons every day or once a month.
The BIK charge is calculated as:
List price (P11D value) x BIK percentage = annual benefit value
You then pay income tax on that benefit value at your marginal rate (20%, 40% or 45%), and your company pays Class 1A National Insurance at 15% on the same figure.
For a £40,000 petrol car emitting 130 g/km in 2026/27, that BIK percentage is around 28%, giving an £11,200 annual benefit. A higher rate taxpayer pays £4,480 a year in income tax on the car they cannot even keep. For the same £40,000 list price as a fully electric car, the BIK percentage is 4%, giving £1,600 a year of benefit and only £640 of income tax for a higher rate taxpayer. The difference is staggering.
Buying a car through a limited company: should you buy or lease?
Once you have decided to go ahead with buying a car through a limited company, the next question is whether to buy outright, finance, or lease. Each has trade-offs.
Buying outright. The company owns the asset and claims writing-down allowances over years. Best where cash is available and you plan to keep the car a long time. Resale proceeds eventually come back as a balancing charge or allowance.
Hire purchase. Treated for tax much like an outright purchase. The company claims capital allowances on the cash price. Interest on the finance is deductible.
Contract hire and leasing. The full monthly lease payment is generally deductible against Corporation Tax (with a 15% disallowance for cars above 50 g/km). 50% of the VAT on each lease payment is recoverable if the car has any business use. No capital allowances apply because the company never owns the car. Often the simpler choice for newer petrol or hybrid models because the tax treatment is more generous than buying.
For electric cars, leasing is now an interesting option because the loss of the 100% FYA has narrowed the gap between buying and leasing significantly.
Buying a car through a limited company: pros and cons
Here is a quick balance sheet on buying a car through a limited company, so you can weigh it up at a glance.
Pros:
- Corporation Tax relief on the purchase, finance interest or lease payments.
- Running costs (insurance, servicing, repairs) paid from pre-tax company money.
- Electric vehicles still extremely tax-efficient under the current rules.
- VAT recoverable on commercial vehicles, pool cars and lease payments (partially).
- Class 1A NIC on the BIK is still cheaper than taking salary or dividends to fund a personal car.
Cons:
- Benefit-in-Kind tax on directors who use the car privately, which is punishing on petrol and diesel.
- You cannot claim the HMRC 45p/25p mileage rates for business journeys.
- VAT on petrol and diesel cars usually cannot be reclaimed on purchase.
- The asset stays in the company and complicates accounts on disposal.
- The 100% First Year Allowance on new electric cars has now expired.
Worked example: a £40,000 electric car in 2026/27
Let’s bring the theory to life. Imagine a limited company director buying a car through a limited company structure, going for a brand new £40,000 electric car in 2026/27.
- Capital allowance: 18% writing-down allowance in year one = £7,200 off taxable profits, saving roughly £1,800 in Corporation Tax at the main rate.
- BIK value: £40,000 x 4% = £1,600 a year.
- Personal income tax for a higher rate taxpayer (40%): £640.
- Company Class 1A NIC at 15% on £1,600: £240.
- Running costs (insurance, servicing, tyres): fully deductible.
Total tax cost to the director in year one: around £640. Total Corporation Tax saving for the company: around £1,800, plus full relief on running costs. The car ends up being significantly cheaper than buying it personally with post-tax dividends or salary.
Now run the same numbers on a £40,000 petrol car emitting 130 g/km: the director’s personal tax climbs to over £4,000 a year, the company NIC is £1,680, and the corporation tax saving from capital allowances is far smaller because the 6% rate applies. The same purchase, in the same company, on similar terms, with a wildly different result. When it comes to buying a car through a limited company in 2026/27, electric still wins for now.
What about vans and pool cars?
Two categories sit outside the normal rules for buying a car through a limited company and remain extremely tax-efficient.
Vans. Treated as commercial vehicles. VAT is generally fully recoverable on purchase, capital allowances are more generous, and the BIK on private use is a flat amount (around £4,020 for 2026/27), not a percentage of list price. Brilliant for trades, deliveries and anyone whose business genuinely needs a van.
Pool cars. If a car is genuinely shared between employees, kept at the business premises overnight, and never used privately, no BIK applies at all. VAT is recoverable and the tax treatment is the most generous of any vehicle type. The bar is high, though, and HMRC actively checks “pool car” claims, so the rules must be followed precisely.
Frequently Asked Questions
Is buying a car through a limited company still worth it in 2026?
For fully electric cars, yes, even after the 100% First Year Allowance expired. The Benefit-in-Kind rate of 4% is still far lower than the cost of buying the car personally. For petrol and diesel cars with any private use, buying a car through a limited company is rarely worthwhile and the personal tax often outweighs the company tax saving.
Can I claim VAT back when buying a car through a limited company?
Only if the car is used 100% for business with no private use, for example a pool car or a sales fleet vehicle. Home-to-work driving counts as private. On a lease, 50% of the VAT is normally recoverable where there is any business use.
How is Benefit-in-Kind calculated on a company car?
Multiply the car’s list price (P11D value) by the BIK percentage for its emissions band. For 2026/27, fully electric cars are at 4%, petrol and diesel cars range from 15% to 37% depending on CO2. The result is the annual benefit value taxed on the director.
Can I use the HMRC 45p mileage rate if I have a company car?
No. The 45p (and 25p above 10,000 miles) mileage rates only apply to employees using their own personal car for business travel. If you are buying a car through a limited company, you instead claim actual fuel costs or use HMRC’s Advisory Fuel Rates.
Is it better to buy a car personally and claim mileage?
Often, yes, for petrol and diesel drivers doing modest business mileage. The 45p rate is generous and tax-free up to 10,000 business miles a year. For electric cars and high-mileage business use, buying a car through a limited company usually wins.
Buying a car through a limited company? Get expert advice from Sepera Accounting
Buying a car through a limited company can save you thousands, or cost you thousands, and the difference comes down to the right choice of vehicle, the right way of funding it, and a clear understanding of the 2026/27 tax rules.
At Sepera Accounting, our team has helped hundreds of UK directors structure car purchases tax-efficiently. Get in touch today and we will run the numbers for your situation so you know exactly where you stand before you sign on the dotted line.
