How To Reduce Your Tax Bill: Buy a 'Green' Car

Currently you can claim a 100% allowance against tax of the purchase cost of a new ‘green’ car purchased by your business.

What is a ‘green‘ car?

So what qualifies as a ‘green’ car?

Well, it’s any vehicle which has CO2 emissions lower than 111 g/km.

Examples of such vehicles are diesel powered Mini’s or Smart cars and obviously the Toyota Prius.  For more examples of ‘green’ cars go to www.green-car-guide.com.

Are there any restrictions?

If you purchase the vehicle through a sole trader business or partnership and there is private use of the vehicle then the allowance is restricted to the percentage of business use only.

If purchased through a limited company there is no restriction but a taxable benefit will arise. This means there will be a national insurance charge to the business of 12.8% on the amount of the taxable benefit and a tax charge on the individual using the vehicle.

The good news is that the taxable benefit on a vehicle with CO2 emissions lower than 120 g/km is only 10% of the list price.

Other cars                        

If you purchase a car which is not ‘green’, allowances are still available as follows:

For vehicles with CO2 emissions between 111 g/km and 160 g/km the allowance is 20% of the cost on a reducing balance basis.  An example of a car in this band is a petrol powered Vauxhall Astra 1.6.

For vehicles with CO2 emissions over 160 g/km the allowance is 10% of the cost on a reducing balance basis.  An example of a car in this band is a petrol powered Audi A3 1.6.

The restrictions outlined earlier also apply to cars in this category therefore in many cases it will not be worthwhile purchasing such a car through a limited company.

The Government is reducing these allowances

It is important to note there is a time restriction on these allowances.  The 100% allowance is due to end in March 2013 and the 20% and 10% allowances will be reduced to 18% and 8% respectively from April 2012.

Leased vehicles

If you lease a vehicle the full rental charges can be claimed as a taxable deduction unless the retail price of the vehicle is over £12,000 and the CO2 emissions are higher than 160 g/km.  If this is the case there is a 15% restriction on the amount which may be claimed.

Should I buy a ‘green’ car?

It is certainly worthwhile purchasing a ‘green’ car because substantial tax savings can be made as well as helping the environment.  There are also other costs savings, for example no Vehicle Excise Duty to pay and cheaper running costs. 

However, it is always worth consulting a qualified and competent accountant or tax adviser before committing to any purchase.