Nobody enjoys the feeling of bagging a great deal, only to realise that with the tax on top, it is suddenly financially out of reach.
Leasing can be one of the most economical ways of hiring your car, and you could be saving even more money on tax through a business lease.
You likely know how car leasing works already, so you'll know that a typical personal contract hire (PCH) quote will already include your road tax and VAT, and if you go ahead with a deal, these will be incorporated into your monthly payments.
However, PCH payments are not usually tax deductible.
With business leasing, you’ll usually be required to pay tax that is calculated from the car’s CO2 emissions, the P11D value (list price) of the car, and your personal income tax bracket.
But it’s not all doom and gloom, as there are savings to be made. If you decide to take out a business car lease, you could claim back up to 100% of the tax!
Here we’ll talk you through who’s eligible for a car lease tax deduction, how you can claim it back, and other ways you might be able to reduce the tax cost on your car lease.
Who is eligible for car lease tax deductions?
When leasing a company car, it always remains the lender’s property - they are the registered keeper of the lease car. That’s why road tax is incorporated into the lease price, as they are the “taxpayer” in this scenario, but they forward the cost to you, along with the cost of depreciation.
With a car lease, you can claim your monthly payments as a business expense, meaning you can reclaim a percentage of VAT depending on the ratio of personal/business use. This could be the deciding factor between taking out a limited company lease or a fully personal lease!
To be eligible for the tax deductions, you should fall into one of the following categories:
- Sole Trader/Self-Employed
- VAT Registered Business
- LLP (Limited Liability Partnership)
- Limited Company
If you’re a sole trader, or recently set up your own company, our guide to getting a self employed car lease talks you through how to qualify, the expenses you can claim, and all the great benefits of business leasing for the self employed.
How much can I claim back?
The amount you can claim back depends on whether your company is VAT-registered, how much the car is used for personal vs business use, and the CO2 emissions of the car.
Can I write off the full cost of the lease as a business expense?
You can write off some of the lease cost as a business expense. The amount depends on the CO2 emissions of the car. To calculate how much this is for you, you are best speaking to your accountant.
Can I reclaim 100% of the VAT on the lease cost?
Since most leased company cars have some degree of personal use, you won't always be able to claim back the full amount of tax.
However, provided at least half of the car’s usage is for business, and your company is VAT registered, you can claim up to 50%.
Claiming back the full amount for business miles can have some tax implications, as each trip you take in the car must be necessary for you to complete your job. These can include:
- Making deliveries or collections.
- Travelling back and forth from meetings.
- Travelling between company branches or offices.
Do I always need to pay company car tax?
You don't need to pay company car tax if:
- You are a business owner, member of a partnership, member of a Limited Liability Partnership (LLP).
- You are using a personal car lease.
- You're offered the choice between a company car or a car allowance, and the value of the cash allowance is higehr than the BIK tax.
You need to pay company car tax if:
- You are using a company car or using a salary sacrifice car lease scheme, and you're not one of the groups outlined above.
How to reclaim tax on a lease car
If you are eligible to claim back on tax, you’ll have to submit a VAT return form that details the personal mileage accumulated.
To get started you’ll just need a VAT number, and your Government Gateway user ID and password.
How to reduce tax costs on car lease
You won’t find us saying no to a tax return, but if you aren’t eligible for the above, there are other steps you can take to reduce the tax cost yourself on a leased vehicle.
Opt for a low emission vehicle
Electric and ultra low emission vehicles (ULEVs) are great for more than just the environment, as road tax and company car tax on electric cars is much lower.
Cars with lower emissions benefit from reduced Benefit In Kind (BIK rates), at 2% for 2022-23. Road tax for zero emissions car is free too.
In addition to this tax relief, you also get the benefit of reduced running costs.
Choose alternative methods of getting to and from work
If your new car has no private use at all, 100% reclaimable VAT looks pretty appealing.
Though you won’t be able to use your car for getting to and from work, (as this doesn’t fall under business mileage) many companies offer bikes through cycle to work schemes.
Alternatively, use your personal car to go to and from work.
To sum up, car lease payments can be tax deductible, but almost exclusively for business leasing.
For all the details specifically related to car leasing through your company, head over to our “how does business car leasing work?” guide.
If you’re looking for more in depth information on tax, our company car tax guide keeps things simple with plenty of examples, and even suggests the best company cars for tax purposes. Or are you leasing a van for business? Our company van tax guide should help.