Buying a brand new Tesla is a dream for many young entrepreneurs worldwide, but with its current price of around 50K pounds in the UK, most people can’t even think of buying it. But what if I told you there is a way to buy a brand new Tesla for less than half of that initial 50K pounds.
Writing of Business Expenses
When you have a business in the UK ( or anywhere in the World ), you’ve got this concept of writing off business expenses, which is a popular term. Basically, what it means is that if you’re buying something purely for business use, then you can take the cost of it out of the business rather than out of your personal bank account.
So, if you’ve got a business and you buy something exclusively for business purposes, you can write it off as a business expense, which means, the cost of the item doesn’t count as your profit because it’s an expense, and therefore you don’t have to pay any corporation tax on it.
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In the UK, corporate tax is 19% at this moment, which means that if you make a profit of 100K pounds a year, 19,000 of them will go to the government as a corporation tax. But let’s say you buy something like a Tesla Model 3 for your business, that would be 50,000 pounds. So that would reduce the overall profit of the business down to 50,000 pounds. You will still pay 19% corporate tax on the remaining 50K, so that you will be paying 9,500.
This way, your total corporation tax for the year is 19% less than the cost of the vehicle. So you’re paying 9,500 pounds less corporation tax for the year. The Tesla Model 3, which initially was priced at 50K pounds, will now cost only 40,500 pounds to the business because of the corporation tax saving.
But is it actually legit to write off a car as a business expense in the UK? So if you want to write something off as a business expense, the general rule is that it has to be wholly and exclusively used for the business and any personal use is insignificant or incidental. So if you’re a blogger, and you buy a new Macbook Pro, for example, that’s very easy to justify as a business expense because you’re obviously using the computer to write your blogs. But it would be a lot harder for you to justify a car especially if the business doesn’t require a lot of travel.
The Benefit in Kind Tax
So, in the UK, if you buy stuff as a business, but then there is some personal use as well, that gets a special tax code called “Benefit in Kind”. This is like the government thinks that you’re being paid the value of the thing that your business bought you, and therefore you kind of income tax on that amount. And so, if this were a normal internal combustion car, that would be quite a lot of tax you’ll have to pay each year for using it for personal reasons.
And often, that would mean that it’s actually not worth buying a car as a business expense.
But here comes the most important part.
Crucially, in April 2020, the new budget of the UK said that specifically fully electric cars are exempt from benefit in kind tax. So the benefit in kind tax for a Tesla Model 3 in the UK is 0%.
This means you can buy it as a business and use it personally as long as you want, and you won’t have to pay any extra tax. And the reason they’ve done this is that in the UK over half of the cars that are bought are bought by businesses. So the government realized that if they incentivize people to buy electric cars by reducing the tax rates, that means overall, more cars in the UK will become electric, and that would be good for the environment.
So currently, the Tesla Model 3 is costing 40,500 because of the corporation tax savings, but there are still a few more discounts you can add to the car’s final price.
If you are a business owner and want to take money out of your business, usually the best way to do that is by something called dividends. The problem is that dividends also get taxed. In England, if you’re a higher rate taxpayer, i.e., you earn more than 37,500 pounds a year, which most people thinking of buying a Tesla do, then your dividend tax rate is 32.5%.
So let’s say you want to take out 10,000 pounds in dividends, you’d be paying 3250 to the government as dividend tax, and that would leave you with 6750. This is very relevant to our discussion about Tesla because the vehicle costs 50,000 pounds. The alternative, i.e., not buying the car and taking out cash instead, means that you’d be taking out that 50,000 pounds as a dividend.
So firstly, because that 50,000 pound is profit, it means it’s taxed at 19% corporation tax, which takes it down to 40,500 pounds. And then you take that 40,500 out as a dividend which means it will be taxed at 32.5%. That means you have to pay 13,162 pounds to the government, which leaves you with 27,377.50.
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So thanks to corporation tax first and dividend tax second, this 50K we’ve tried to take our business has gone down to just 27,000 pounds, but that’s still not the end of the story.
We also have to take student loans into account. Let’s say you have a student loan of 60,000 pounds after graduation. Because the system in the UK is so great, you have to pay a certain percentage of any amount you earn above around 20,000 pounds. So, you have to pay 9% of everything you earn above a certain threshold to the student loans company.
So if you want to take out the price of the Tesla as a dividend, first it goes down from 50K to 27.3K thanks to corporation tax and dividend tax. And then you pay another 9% of the student loans company, which takes it down to 24,877 pounds.
So putting it all together, let’s think about these two scenarios.
- Buying the Tesla Model 3.
- Taking out that 50K pounds in cash instead.
If you buy the Tesla Model 3 for 50,000 pounds, it ends up costing your business 40,500 pounds, and in comparison, if you decide to get the cash out of your business, you will get only around 24K pounds. This means you can get the Tesla Model 3 for half the original price.
And this whole thing about business expenses is one of the reasons why having your own business is such a powerful thing because, especially if you’re a solopreneur or a content creator like me, most of the stuff you’re going to buy for business purposes is actually going to be tech so that you can afford a fancy new laptop or a super widescreen high-resolution monitor. Because effectively, you’re getting all of this at half price or less.
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