Tax benefits graphic
Ryan Darby

Ryan Darby

Ryan takes the lead on all things 'wordy'. With a sports media background, a true passion for cars, and a LOT of driving experience under his belt, he'll make sure you have all the information you need, when you need it.

Read time of 7 minutes.

What are the tax benefits of business car leasing?

Business lease deals are a great option for those looking to lease a car through their business or offer their employees benefits such as company cars.

You can make huge VAT savings on your monthly payments by taking out a business car lease, while they also come with a host of additional tax benefits. By leasing a car, you also free up cash flow that simply would not have been possible if you were to buy a 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 a hassle-free driving experience for you, your team and your fleet. 

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

The tax benefits of business car leasing

  • Vehicle costs are kept off your balance sheet, freeing up important credit for elsewhere.
  • You can claim back 100% of the VAT on payments if the vehicle is used solely for business purposes, this reduces to 50% if used for personal journeys too
  • You can offset up to 100% of the cost against your tax bill depending on the emissions of the vehicle, for van leasing this is 100% regardless of emissions
    • 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

Things to consider when taking out a business car lease:

  • If you are 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

When asked about the benefits of car leasing for businesses, Ben Banks, who knows everything there is to know about commercial leasing, said: "Leasing is a popular choice amongst businesses as it offers unrivalled financial freedom and significant tax benefits. 

"For example, on purely commercial vehicles, 100% of VAT is written off and 100% of the lease payments and associated costs can be classed as an expense against your annual tax bill. 

"Most valuable to many businesses is the reduced downtime associated with a new car or van, and the fact it keeps credit lines open for investment elsewhere in the business. 

"Businesses won’t have to predict the depreciation levels and resale values of their fleet: with a lease you can budget to the penny from the start. That’s without even mentioning the environmental improvements, safety innovations and pure driving pleasure available when accessing the newest vehicles on the market."

going through paperwork

Are business car lease payments tax deductible?  

Yes, if you are a Limited Company you can use your monthly lease payments to offset your corporation tax. If you are 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 are not the vehicle owner and are not buying outright.

Can you claim back VAT on your car lease payments?

You can only reclaim VAT on your car lease 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 lease car for personal use too, you can only claim up to 50% VAT back.

Another perk is that additional charges associated with lease cars 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 to their monthly payments. The package includes things like scheduled services, tyre repairs, MOTs and a complimentary wash and vacuum.

This allows for easy budgeting, which can be invaluable, especially in the current climate. When you agree to the terms of your lease, you will find a fixed monthly payment that suits you and if you take advantage of our maintenance package, there is not much else to take care of apart from your fuel!

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

Ben Banks Quote

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 which is a popular choice. However, if you also use the car for personal journeys you will have to pay Benefit in Kind tax, a tax placed on company cars if the vehicle is not used solely for business.

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 are offering a business lease to employees as a company car, you will need to pay higher National Insurance Contributions. 

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

In addition to this, 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 (BiK) 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 leased business 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 vehicle or a fully-electric car, 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, like a petrol BMW 3 Series Saloon that currently sits in the 34% BiK banding and would cost you an extra £445 a month as a 40% taxpayer.

Although BiK can appear daunting, company car tax still can work out cheaper than personal tax. 

Take the stress out of calculating company car tax with our BiK calculator.

Is leasing good for company accounts?

Leasing can be hugely advantageous for businesses when compared to financing or traditional PCP deals. This is because the act of leasing a car or van does not count as a liability on your balance sheet.

You do not own the vehicle so it will not be listed as an asset to your company. This will improve your chances of potentially borrowing money in the future, especially if you are leasing multiple company cars.

Our top tips for choosing the right vehicle for your business.