When paying for a car through a finance plan, where you make monthly repayments over a fixed term to fully pay off the loan, you may wonder if you can dedicate some of these payments for tax purposes.
The answer to that question is a bit more complicated than a simple yes or no, and instead will depend on how you bought the car and what you use the vehicle for.
Here’s a helpful guide that includes essential questions to ask to help you better understand your options when trying to deduct tax from your car finance payments. If you’re unsure about how car finance works or need advice on other ways to fund a car purchase, we have plenty of guides available here on Car Adviser.
Are you self-employed?
You’ll have to consider many factors and situations when trying to figure out if you can get tax relief for your car finance payments. The first and primary consideration you will have to make is whether you’re self-employed.
If you are employed by someone else and work as a typical salaried employee, then you won’t be able to get any tax deductions for your car finance payments. That said, some businesses may allow you to claim expenses for things like fuel costs when using your car to travel to work or for business trips.
If you are self-employed and run your own business, you’ll be able to claim tax deductions for your car; however, you’ll have to consider other things to determine the extent of what you can claim.
What’s the purpose of your car purchase?
Your intended usage for your car will determine what you can claim as tax relief and the extent you can claim.
If you’ve purchased a vehicle with the intention for it to be used only when you’re working, such as getting you to meetings, jobs, and appointments, then you will be able to claim the cost of the vehicle as an allowable expense.
However, if the car is only used for personal use, such as going to the shops or dropping family members at school, you won’t be able to claim tax deductions for your car finance.
Things can get a bit murky if you use the vehicle for business and personal usage. In this situation, you’re only able to deduct a proportion of tax that lines up with the amount that you use the car for business. So if you spend 30% of your driving time in the car for work purposes, you’ll be able to claim 30% of your finance repayments as tax deductible. To make sure that your dedication claims are accurate, creating a timesheet for when you use your car for business purposes may be helpful. When doing this, track the time and mileage you use for business reasons.
What are the HMRC rules on car tax deductions?
His Majesty’s Revenue and Customs (HMRC) is the main governing body that deals with taxes in the UK, and this organisation provides a lot of details about what you can and can’t do regarding tax-deductible car finance payments.
According to HMRC, if you’re a business owner, you can claim the car’s purchase cost as a capital allowance. This means that you’ll be able to subtract the value of the vehicle from your business’s profits before you pay your taxes.
As a result, your tax bill will become smaller, making your finance repayments tax deductible. It’s best to get assistance from an accountant when doing this, as they can guide you through the process and ensure that you do it correctly.
When getting capital allowance, this is only applicable for cars. In business terms, HMRC considers anything that isn’t designed to transport goods as a car, providing that it’s suitable for private usage.
The amount you can claim through capital allowance will depend on a couple of factors: the date of purchase and the CO2 emissions of your car. With this information, you’ll be able to work out if you’ll get the first year rate, the special rate, or the main rate allowance.
If you have a business that also has employees using cars for business purposes, you may also claim these vehicles for capital allowance. However, you can only do this if the vehicles are company cars and are not used for personal use. If these vehicles are also used for private purposes, then the cars should be declared as a benefit instead.
How did you finance the car?
If you’ve purchased a car for your business, what you can claim and how that claim looks will differ depending on how you bought the car. Car Adviser knows there are multiple wants to buy a car, and all of these can alter what you can claim.
For instance, if you got a loan or took out car finance, you will only be able to claim a tax deduction on the interest of the car. Depending on the car’s CO2 levels, you can also claim capital allowance.
If you leased the vehicle, you would only be able to claim it as a business expense. However, this is only available for cars that have a CO2 level above 100g/km.
Are you the owner of a business?
If you’re a business owner, then instead of being able to claim back tax deductions for your finance payments, you can claim for mileage as well as any other costs relating to your vehicle, such as the costs of services. Doing this can make your tax repayments smaller, helping you save money.
You can claim 45p for every mile your car is used for business purposes up to 10,000 miles. Beyond this mileage, you can claim 25p for every mile drive, again only for business purposes. Check the car’s mileage annually to see what repayment rate you can get.
Final Verdict
You can make your car finance payments tax deductible; however, various factors and situations determine if you can do this or not.
Tax deductions are only applicable if you own a business or are self-employed and if the car is being used for business purposes. The amount that you can claim will then depend on how you paid for the vehicle, meaning that getting tax deductions can be completed and tricky.
If you want further advice, the HMRC website has everything you need to know.
