Deciding whether a company car for your UK business makes sense is rarely straightforward. The right choice depends on your legal structure, how you will use the vehicle, the type of car you choose, and the tax treatment you are prepared to accept. For women running UK businesses, the numbers can make or break the decision. Below is a practical overview of the main cost and tax issues for sole traders and limited companies in the 2026/27 tax year.
Sole trader car cost options
As a sole trader, you and your business are the same legal entity. That means you cannot truly buy a car “through the business” in the way a limited company can. The car will be registered in your name, and any tax relief must reflect the split between business and private use. You can read more about what you can claim in our guide to allowable expenses for the self-employed.
You have two main ways to claim car costs:
- Simplified expenses mileage rates. HMRC sets flat rates for 2026/27 at 45p per business mile for the first 10,000 miles in a tax year, and 25p per mile after that. This covers fuel, servicing, depreciation and insurance, so you cannot claim those costs separately.
- Actual costs, apportioned. You can claim the business proportion of insurance, repairs, servicing, fuel, road tax and breakdown cover. Your accountant can help you agree a sensible business-use percentage based on mileage records.
Importantly, travel between your home and a permanent workplace is classed as private commuting, not business travel. Journeys that are purely personal are also not allowable. Good records are essential whichever method you choose.
Limited company car cost options
A limited company is a separate legal entity, so it can own or lease a car in its own name. The company name will appear on the V5C registration document, and the company can choose from outright purchase, contract hire, finance lease, hire purchase or a business loan. If you are weighing up structure, our sole trader vs limited company guide explains the wider tax picture.
However, company car ownership brings extra tax layers: VAT, benefit in kind tax, capital allowances and employer National Insurance.
VAT recovery on a company car
If the company buys a car outright, the VAT is usually blocked from recovery unless the vehicle is used exclusively for business and is not available for any private use, including commuting. In practice, this is difficult to prove.
If the company leases the car, HMRC allows 50% of the VAT on lease payments to be reclaimed when there is any private use. If the car is genuinely not available for private use at all, 100% of the VAT may be reclaimed. Maintenance and servicing contracts may also need to be apportioned.
Benefit in kind tax charges
Where a company car is available for private use, including travel between home and work, the director or employee is taxed on a benefit in kind. The company also pays Class 1A National Insurance contributions on the benefit.
The benefit in kind value is based on the car’s list price, known as the P11D value, and its CO2 emissions. For 2026/27, HMRC taxes fully electric cars at a benefit in kind rate of 4%, rising to 5% in 2027/28. Low-emission petrol and diesel hybrids are taxed at higher rates, and diesel cars that do not meet the RDE2 standard carry a 4% supplement, subject to the overall 37% maximum.
If the company also pays for private fuel, that creates a separate fuel benefit charge, which is often expensive enough to make it not worth claiming.
Capital allowances on company cars
The company can claim capital allowances against the cost of the car, but the rate depends on CO2 emissions and whether the car is new or second-hand. From April 2025, HMRC replaced the previous 100% first-year allowance for new electric cars with full expensing. For cars purchased from April 2025:
- New and unused zero-emission cars qualify for 100% full expensing in the year of purchase.
- New and unused cars with CO2 emissions of 50g/km or less go into the main rate pool at 18% a year.
- New and unused cars with CO2 emissions above 50g/km go into the special rate pool at 6% a year.
Second-hand cars do not qualify for full expensing; HMRC places them in the main or special rate pool depending on emissions. These rules make electric and low-emission cars far more tax-efficient than high-CO2 vehicles.
The mileage allowance alternative
Many owner-directors find it cheaper to buy or lease a car privately and claim business mileage from the company. HMRC approved mileage allowance payments are 45p per mile for the first 10,000 business miles and 25p per mile thereafter. If the company owns the car, you should use HMRC’s Advisory Fuel Rates to reclaim business fuel only. These rates are updated quarterly.
Other considerations for your business
Image and recruitment impact
Beyond tax, a company car can send a message about your brand. A well-chosen vehicle may reassure clients or help attract staff, particularly where a car is offered as part of a remuneration package. Business finance schemes can sometimes make a newer or more efficient car affordable than a personal purchase.
Budget for the true monthly cost
Contract hire and leasing packages can make cash flow predictable. Many deals bundle road tax, servicing and maintenance into one monthly payment, leaving only fuel and insurance to budget for separately. Just remember that the apparent simplicity can mask the true cost once benefit in kind tax and employer National Insurance are factored in.
Deciding on a company car for your UK business
There is no universal answer. A low-emission company car can be very tax-efficient for a limited company, while a sole trader will usually be better off using simplified mileage rates or apportioned actual costs. High-emission cars, private fuel and heavy personal use tend to erode the tax advantages quickly.
Because the rules change regularly and the best structure depends on your exact circumstances, speak to your accountant or tax adviser before committing. You can also check the latest HMRC guidance on self-employed expenses, company car tax and advisory fuel rates on GOV.UK. For a broader view of self-employed tax, see our Self Employed Tax UK guide for 2026/27.
Practical action steps to take
- Estimate your annual business mileage and compare simplified mileage rates against apportioned actual costs.
- If you run a limited company, calculate the benefit in kind cost for any car you are considering using HMRC’s company car tax calculator.
- Check whether the vehicle qualifies for full expensing and what capital allowance pool it falls into.
- Decide whether the company will own, lease or simply reimburse private mileage at HMRC approved rates.
- Speak to an accountant before signing any contract, because the wrong structure can cost thousands over the life of the vehicle.
