Tax benefits of leasing a car for businesses

There are many benefits when it comes to leasing a vehicle, and those benefits don’t stop when it comes to your taxes.

Taxes – no one likes them, no one likes dealing with them, overall, not a fan favourite.

Taxes when it comes to business leasing? Slightly more likeable.

For employers, whether you’re looking to lease a car through your business or offer your employees a company car or as part of the salary sacrifice scheme, there are big financial advantages to gain.

There are huge VAT savings to be made on your monthly payments by opting for a business lease deal. 

Christmas really has come early.

We'll talk you through the details of leasing for businesses, so you have a clear understanding of your monthly outgoings and potential savings. 

From Benefit in Kind (BiK) to National Insurance, a business lease can come with a hefty amount of tax implications. But don’t fret, we’ll show you the tricks of the trade.

Tax benefits of business car leasing

Save on VAT – Is this car for business only? 

You can claim back a whopping 100% of the VAT. Even if your car doubles as the weekend getaway car, you can still claim back a solid 50% of the VAT—pretty good for double duty, don’t you think?

Tax deductions – Drive smarter, not harder. 

Depending on the CO2 emissions of the car you’ve chosen to lease, you can offset up to 100% of the lease costs off your business taxes. Just another reason to step into the world of electric vehicle leasing.

For vans, leasing is much more forgiving. No matter the emissions, 100% of the cost can be offset against your tax bill

Better cash flow – Why blow your budget on big upfront payments when leasing lets you keep cash in your pocket for other exciting business plans? 

Plus, leasing keeps your credit lines open for more exciting business investments.

Hassle-free budget – With fixed monthly costs, you don’t need to spend time and energy on worrying about depreciation and resale value. 

And at the end of the lease? Just hand back the keys and you’re ready to go again.

What to consider when taking out a business car lease

Offering company cars to your employees is a great way to get the “best boss” accolade. 

However, as the employer, you will be expected to pay a tad more National Insurance, and your employees will have to pay Benefit in Kind tax to cover the perk of having a shiny set of wheels at their disposal.

The financial freedom that comes with leasing a car for your business is a total game-changer. You’ll forget all about other financing options by the end of reading this.

For instance, if your vehicle is strictly for business use, you can write off 100% of the VAT and chalk up the lease payments and costs as a business expense. 

That’s some serious tax-friendly magic right there.

Going for a new car or van over a used one is also a win for your wallet. Newer vehicles tend to behave better—less downtime, fewer repairs, and way less hassle.

Not just in your personal life, but especially with your business, if you didn’t budget things would get out of hand pretty quickly. Though a popcorn machine for the office would be a good idea, I doubt many businesses budget for this in the year.

The budget needs to consider all aspects of the business to make sure targets are met and profits made. Faffing over depreciation costs, service costs, first three years of MOTs, for varying cars you may have in your fleet... This can add a real admin headache when it comes to your budget.

Luckily, with a fixed monthly payment that covers all these costs, without the resale stress, means leasing will make the whole process super simple.

Oh, and did we mention? 

Leasing means you get to enjoy the latest eco-friendly, safety-packed, and downright fun-to-drive models on the market. So, what’s not to love?

Are business car lease payments tax deductible?

The short answer is yes. If you run a business, you can use the cost of leasing a car to lower your taxes.

For Limited Companies – your monthly lease payments can reduce your Corporation Tax.

For Sole Traders or Partnerships – you can use lease payments to reduce your annual tax bill.

So, you want to know what’s tax deductible? 

An electric car lease is. Both business and personal electric leases are 100% tax deductible, with the government very keen for the EV revolution.

Who doesn’t love 0 g/km CO2 emissions? Better for your taxes and the planet, a win-win.

Petrol, diesel, and plug-in hybrids? 

If they emit less than 110 g/km, the car is still completely tax deductible. Cars emitting 111 g/km of CO2 or more are still tax deductible but only up to 85% of its value, this rule was introduced in 2018.

Van leases don’t apply to this, you can offset 100% of the cost regardless of the lease van’s emissions.

When leasing a car you can’t claim Capital Allowance as you don’t own the car.

Can you claim back VAT on your car lease payments?

First things first. You have to be VAT registered to claim VAT on your lease car payments.

If your car is purely for business purposes, then you can claim 100% VAT.

If you use the car for bit of fun and bit of business, a 50/50 split, then 50% VAT can be claimed.

Let’s talk service charges – excess mileage charges and maintenance packages, for example, are another opportunity for tax benefits for you.

We are just spoiling you now.

These service charges in question, you can claim back 100% VAT on them, and (yes it gets better) offset 100% of the charges against your annual tax bill – pretty good right?

At Carparison, we are always trying to make life easier for you, we offer all our customers the option to add a maintenance package. This agreed payment gets added on to your monthly lease payments.

How easy is that?

This includes things like scheduled services, tyre repairs, MOTs and all your disposable bits and bobs.

Making budgeting quicker and easier for business vehicles, this can be invaluable, especially in this ‘cozzy livs’ (Cost-of-Living crisis, for those who aren’t on social media).

There’s not much else you need to worry about apart from fuel.

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

Can I lease a car through a limited company?

If you’re the boss of a Limited Company, that means you can utilise a lovely Business Contract Hire (BCH) deal through the company.

But here’s the deal: if you take your company car on personal adventures – school runs, beach trips, or late-night snack missions – you’ll need to pay Benefit in Kind (BiK) tax. 

Basically, the taxman’s way of saying, “Nice car, mind if I tag along?”

That being said, leasing through your Limited Company has some pretty cool perks if we do say so ourselves – lower corporation tax and claiming back VAT.

Considerations for business leasing

Sorry to dampen the mood, but when offering a business lease as company cars for your team, this comes with a higher National Insurance contribution.

This doesn’t compare to the savings already discussed – but sadly there is a small price to pay for your crew driving in style.

Meanwhile, your employees will also chip in with some BiK tax to cover the extra goodies they’re enjoying alongside their paychecks.

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.

We can’t give you a simple answer for how much BiK tax employees will have to pay on a business lease car, sadly. That would be too straightforward. 

BiK 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 – a go-to suggestion would be an office pool table, absolute crowd pleaser.

Currently, electric car tax is fixed at 2% until 2025, when it will start rising, topping out at 9% in 2029/2030.

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.

Is leasing good for company accounts?

Your company accountants will love you, freeing up their balance sheets and business liabilities with leasing, compared to more old-school financing methods such as the traditional PCP deal.

That’s right – no ownership, so no need to list as an asset. 

This keeps your balance sheet freed up for the more boring aspects of business, and opens more opportunities on borrowing money in the future, keeping lines of credit clear.

What about salary sacrifice schemes?

Suppose you’re an employer looking to provide a non-cash incentive to your staff members, or an employee hunting for an affordable way to score a shiny new car. An electric car salary sacrifice scheme could be just the ticket.

It’s a win-win with tax savings all around. Employees save on Income Tax and National Insurance, while employers cut down on Class 1 National Insurance Contributions.

And the best part? It’s a piece of cake.

All you do is ‘sacrifice’ a slice (of chocolate cake - sorry, cake is now on the mind) of your gross salary to cover the net lease cost, and boom – you’re cruising in one of the latest EVs for a fraction of the price.

Sure, there’s still a bit of BiK tax to pay, but since electric cars sit in the lowest BiK brackets, the monthly cost is a drop in the bucket compared to the savings.

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