As a sole trader, buying a car in the most tax-efficient way is something that can really benefit you and your business. Given that buying it through your business can allow you to claim expenses and reduce the tax you pay, it is understandable that you may be interested in following this route.
At Right Fuel Card, we want to support you in making the best decision for your business. Our goal is to reduce any unnecessary expenditures and to help inform your decisions on vehicles.
In this guide, we will cover all the pros and cons of buying a car as a sole trader, and the best way to go about it, so that you know exactly what to do.
Do you need a car for your sole trader business?
A question that you first need to ask yourself is whether or not you actually need a company car as a sole trader. Despite it being a common thing for self-employed business owners to do due to HMRC’s rules, depending on the type of business you are running, it may or may not be worth it.
However, should you choose to go down the route of buying a car for your sole trader business, it can be extremely tax-efficient. It does come with some complicated rules to navigate, but this is what we are here to help explain.
Should you buy or lease a car through your sole trader business?
Buying or leasing a car through your sole trader business can have some definite positives, especially regarding tax. With the rules that HMRC have put out as well, it is also a pretty common thing for self-employed people to do. Depending on what your goals are for your business and what your financial situation is, though, one could be better than the other.
Below, we have put together some of the pros and cons of buying and leasing a car to help you make your decision.
Benefits of buying a car for your sole trader business
If you choose to go down the route of buying a car for your business, it is worth considering all the benefits and downsides beforehand.
Firstly, being a sole trader means that the process of buying your car is actually very simple, as you can choose to buy the car either yourself or through the business. Because there is no legal separation, officially buying your car through the business means that you can claim the costs instead. Since you will have to pay either way, there’s no difference in how you finance the purchase.
As a sole trader, making a car purchase means that once you have paid it off it becomes an asset of the business, and it can be sold later down the line. If you did end up selling the vehicle, the company would then owe tax on any profits above the car’s value made from the sale. Capital allowance can also be used to claim tax relief, leading to potential upfront deductions on electric cars and smaller annual deductions for other types of cars.
Keep in mind that if you do decide to buy an electric car as a sole trader, there are a few factors to consider. Whilst there is a new pay-per-mile tax from April 2028 to be aware of, which could impact your decisions, the concept of electric roads is something to keep in mind going forward as well.
Naturally, buying a car for your business outright does mean that there is a large cash outlay needed upfront, so you will have to already have a chunk of money to spend. The type of car you buy also affects how much tax relief you can get, with higher emission cars making it slower. It must also be said that there is a risk of resale value, as, should you sell the car for less than it is worth, you get extra deductions, and if you sell it for more, you can be taxed.
Overall, owning in the long run does have the potential to be cheaper than leasing. This is especially the case if you keep the car for a long period of time due to you not having any financing or profit charges.
Benefits of leasing a car for your sole trader business
That said, leasing a car certainly has its upsides, especially for newer businesses that maybe don’t have the funds of someone more established.
As is the case when you lease a car, there is no need to worry about high upfront costs, as an initial deposit and a fixed monthly cost are the only fees involved. It also means that you don’t have to worry about the value of the car depreciating, as you can hand the car back to the leasing company or pay an already agreed-upon fee if you want to keep the vehicle. Choosing to lease a car as a sole trader allows for VAT-registered businesses to reclaim 50% of the VAT on the lease bills.
Another positive of deciding to lease your car is that if you decide you would like to change it, you aren’t stuck. Leasing allows you to swap cars when you need or require, giving you increased flexibility to meet the needs of your business.
Going down this route does lead to payments of interest, though, meaning that as a long-term solution, the costs can add up to more than just buying a car outright. With the leasing process, once it ends, there can also be additional charges for any wear on the vehicle, along with you not having an additional asset. If you change your mind during the lease, getting out of it can also cost a lot of money.
Looking at the bigger picture for leasing, it may be right for you if you don’t have large sums of cash to pay upfront and want to manage your cash flow.
Buying a car for your sole trader business: Key considerations
Read below to discover some key considerations to bear in mind when it comes to buying a car for your sole trader business:
Deciding on business use
Something to consider is that the rules of self-employment are very specific, meaning that you aren’t able to claim through your business when making personal purchases. So, only claims on the business usage of your car can be made, with HMRC requiring evidence of your car’s usage for work. Keeping track of your personal vs business usage is important, so take note of how often you use it for both by using percentages (e.g. 70% business and 30% personal).
Choosing a method
The next step here would be to decide whether you’re going to claim the car’s total price or just the business portion instead. For the business portion, you can use the Annual Investment Allowance (AIA) or the Writing Down Allowance (WDA) to deduct the cost.
Tracking your mileage
To be able to accurately claim the right amount of business expenses, recording your mileage and logging it somewhere is key to working out the percentage of business use.
Expensing the cost
Buying a car through your limited company in the UK leaves you with four main ways to expense your costs. This includes claiming mileage, buying a car with cash, hire purchase, and claiming lease payments.
With regard to claiming mileage, you could potentially save more tax if it is mostly used for business. Typically, lots of sole traders choose to buy the car themselves and just claim their mileage allowance because it’s easier.
If you want to understand more about this, read our business mileage guide that breaks down what it is so you can learn what it is and how to claim it.
Paying with cash is the next option here, allowing you to outlay the cost of the business side of your car. This is where using capital allowances comes into play, with tax relief becoming something you can receive. Buying the car outright also allows for claims to be made on things like fuel, insurance and repairs made on your car as expenses that can get tax deducted.
Hire purchases, similarly to outright purchases, can also allow for capital allowance to be claimed, along with the condition that it is only for the business use of the car.
Finally, leasing vehicles leads to the ability to claim your lease payment against your taxes. This also comes with the added benefit of deducting costs such as fuel, insurance and repairs. Like any other method of purchasing a car for your sole trader business, claims can only be made on business usage.
Speak with tax experts
To ensure that you’re certain on potential tax implications, consult with a tax expert to ensure that you’re claiming all that you are entitled to.
How can Right Fuel Card help you?
Now that you know more about buying a car for your business as a sole trader in the UK, you may feel ready to make your decision on how you are going to purchase your car. No matter how you buy the car, it comes with logistics such as keeping on top of your fuel expenditures that can be tricky to keep up with.
At Right Fuel Card, we help thousands of businesses in the UK, including sole traders, by making tracking fuel costs simple and helping with fuel budgeting. With many services, such as our selection of fuel cards, Quartix telematics, and Rightcharge EV charging, managing and tracking your fuel costs has never been simpler. Depending on your sole trader business, you may have different needs and requirements, which is why we have specific cards that suit individual needs.
Fuel Card Guide: To help you decide on which card to pick, we have a complete fuel card guide, explaining how they work, the types of fuel cards we offer, and how to pick the best one for you.
Compare cards: You can also use our fuel card comparison tool to help you see options that are tailor-made for your business.
Apply online: Fill out your online application within a few minutes, with approvals usually being processed within 48 hours. We also have options whether you have a credit history or not.
Begin saving: After approval, your card will arrive in 7-10 working days. Once it has arrived, you can begin spending on fuel, knowing that you can keep track with one VAT-compliant invoice.
So, to get your fuel card with us, you can either explore our fuel card options or contact us to start making your fuel expenditures simpler and more efficient for your business.
