Tax benefits of leasing a car for businesses

What are the tax benefits of business car leasing?

Business leasing is a great option if you’re looking to lease a car through your business or offer your employees a company car or salary sacrifice benefit.

You can make huge VAT savings on your monthly payments by opting for a business lease deal.

There’s also a whole host of additional tax benefits on the table. And, by leasing a car, you also free up cash flow that simply wouldn’t have been possible if you bought the car outright.

Having a clear understanding of the exact money being paid towards a company car each month can give you financial peace of mind, and provides a hassle-free driving experience for you, your team, and your fleet.

From Benefit in Kind (BiK) to National Insurance, a business lease can come with huge tax implications, so we’ve compiled this helpful guide to provide you with all the information you need

Tax benefits of business car leasing

The tax benefits of leasing a car through your business include: 

• The vehicle costs are kept off your balance sheet, freeing up important credit to be used elsewhere.
• You can claim back 100% of the VAT on your monthly payments if the vehicle is only used for business purposes, or 50% if you also use it for personal journeys.
• You can offset up to 100% of the cost against your tax bill depending on the emissions of your car.
• Van leasing allows you to offset 100% of the cost against your tax bill, regardless of the emissions of the van.
• Excess mileage and maintenance packages are service charges that you can claim 100% of the VAT back on and offset 100% of the cost against your tax bill.

What to consider when taking out a business car lease

• If you’re offering a company car to employees, you will be expected to pay higher National Insurance.
• Your employees will need to pay Benefit in Kind tax to account for the added value of having a company car.

Leasing is a popular choice for businesses because it offers unrivalled financial freedom and significant tax benefits, especially when weighed against other financing methods.

For example, on vehicles that are used for commercial purposes only, 100% of the VAT is written off, and 100% of the lease payments and associated costs can be classed as an expense against your annual tax bill.

Opting for a new car or van over a used one will also save you money in the long run, because they tend to go wrong less and need less downtime. It also keeps credit lines open for investment elsewhere in the business.

Business leasing also helps you budget to the penny from the start – you won’t have to predict depreciation levels and resale values. Depreciation is set for you at the start, and you’re not responsible for selling the car or van on.

Once the contract comes to an end, you simply hand the vehicle back and move on to the next one. 

And we’ve not even started on the environmental improvements, safety innovations and pure driving pleasure available when you can get behind the wheel of the newest vehicles on the market.

Are business car lease payments tax deductible?

Yes, if you’re a Limited Company you can use your monthly lease payments to offset your corporation tax. If you’re a Sole Trader or Partnership you can also offset your lease costs against your annual tax bill.

However, the amount you can offset will depend on the car that you lease.

Your vehicle will only be completely tax-deductible if the car in question emits less than 110g/km. For vans, you can offset 100% of the cost regardless of the lease van’s emissions.

Cars that emit 111g/km or more still qualify as tax-deductible, but only up to 85% of its value. A rule that was introduced in 2018 saw a 15% tax disallowance placed on vehicles with higher CO2 emissions.

Capital Allowance cannot be claimed on a leased car as you’re not the vehicle owner, and you’re not buying outright.

Can you claim back VAT on your car lease payments?

You can only claim VAT on your lease car payments if you’re VAT registered.

You can claim 100% VAT if you use your vehicle solely for business purposes. If you use your business car for personal use too, you can only claim up to 50% VAT back.

Another perk is that additional charges associated with lease car or vans, classed as service charges, also have tax benefits.

Excess mileage charges and maintenance packages, for example, are considered service charges. If they apply to your lease deal, you can claim 100% VAT back on those charges and offset 100% of the charges against your annual tax bill.

We offer all Carparison customers the opportunity to add a maintenance package.

This is bolted onto your monthly lease payments, and includes things like scheduled services, tyre repairs, MOTs and all your disposable bits. This allows for easy budgeting, which can be invaluable, especially in the current climate.

When you agree to the terms of your lease, you’ll get a fixed monthly payment. If you take advantage of a maintenance package, there’s not much else to take care of – other than your fuel.

We know that you’ve got enough on your plate already without adding extra hassle trying to figure out depreciation and rising costs. 

Can I lease a car through a limited company?

If you run your own limited company, you can take out a BCH deal through the company. 

You’ll just need to bear in mind that if you also use the car for personal journeys, you’ll have to pay Benefit in Kind tax – a tax placed on company cars if the vehicle is not solely used for business purposes.

However, many benefits come with leasing a car through a limited company, including the opportunity to lower your corporation tax and claim back VAT.

Considerations for business leasing

Although marginal compared to the savings already discussed, if you’re offering a business lease to employees as a company car, you’ll need to pay higher National Insurance Contributions. 

This applies to all benefits provided by a business to its staff, and the increase will depend on the value of the benefits provided. 

In addition, employees will be required to pay BiK tax to account for the additional value provided on top of their salary.

How much Benefit in Kind tax do you pay on a leased car?

Benefit in Kind is a tax placed on company cars to recognise the financial value of having a vehicle in addition to your salary.

The amount of BiK you pay on a business lease car will depend on a few different factors, including the car’s value, its CO2 emissions and your personal income tax rate.

You can save money on BiK by opting for a hybrid or electric car lease, like a Tesla Model Y or a Volkswagen ID.3.

Company car tax on electric cars is a lot cheaper than on the petrol or diesel equivalent, so you could save yourself a tidy sum that can then be spent on something a lot more fun.

Currently, electric car tax is fixed at 2% until 2025, when it will rise by 1% each year until 2028.

This is still a fraction of the cost of the BiK tax you’d have to pay on a combustion engine car. For example, if you’re in the 40% tax bracket, you’d pay £243.95 a month on the petrol Vauxhall Mokka. 

But if you switched to the Vauxhall Mokka Electric, that figure drops to £27.48 – a whopping saving of over £200 a month.*

Although BiK can appear daunting, company car tax can still work out cheaper than personal tax, even if you’ve opted for a petrol or diesel car.

Take the stress out of calculating Benefit in Kind with our company car tax calculator.

*Prices correct at time of publication. 

Is leasing good for company accounts?

Leasing can be hugely advantageous for businesses when compared to other financing methods, like the traditional PCP deal.

This is because leasing a car or van doesn’t count as a liability on your balance sheet. 

You don’t own the vehicle, so it won’t be listed as an asset. This can improve your chances of potentially borrowing money in the future, especially if you’re leasing multiple company cars. 

What about salary sacrifice schemes?

Suppose you’re an employer looking to provide a non-cash incentive to your staff members, or an employee looking for an affordable way to get your hands on a new car. If that's you, it’s worth looking at an electric car salary sacrifice scheme.

Tax benefits are involved for employees and employers, with employees saving on Income Tax and National Insurance, while the business saves on Class 1 National Insurance Contributions.

And it’s dead simple.

By simply ‘sacrificing’ a portion of gross salary to pay for the net cost of the lease, someone opting for a salary sacrifice electric car can get their hands on the latest EVs for less. 

There is still BiK to pay on the car, but with electric cars falling into the lowest rates of BiK, it’s only a small monthly cost compared to the savings that can be made.

Take a look at our salary sacrifice calculator, and see what you could save on your next electric car lease.