Should you lease a car in your own name or do it through your company? This is a question our clients ask often and to be honest, there is rarely a straightforward answer.

There are all sorts of considerations, and the rules are different depending upon whether you have a limited company or you’re a sole trader, want to lease a car or choose to go for a van.

In this article we’ll go over some of the main points about buying a company vehicle versus leasing one.

Should I lease a car for my business?

The first place to start is with an issue that has nothing to do with taxation, and that is your business strategy. You see, the important thing to bear in mind is that there is no point in choosing to lease (or not lease) a new car if it makes no sense for your business, even if it is tax efficient.

So, the first point to make is that leasing a new vehicle has to be a business decision first and foremost. Choosing how you structure the finance comes second.
 

What types of car finance are available for businesses?

Before we get into the tax side of things, we thought it would be useful to go over the different types of car finance which are available. There are a lot of different ways to finance a new vehicle, but they generally come down to Hire Purchase (HP), a loan, renting, or leasing (also known as PCP).

Using a loan to buy a car

If you use a loan from your bank or finance company, the car is yours from day one. You pay interest on the loan and part of the capital each month, so you’re paying back both the amount you borrow as well as the interest the lender charges. At the end of the term, you still have the vehicle with nothing to pay.

How does Hire Purchase (HP) work for cars?

HP is slightly different. Legally you are actually renting the vehicle for the whole term, and only get to own it once you have made all the payments. But again, at the end of the agreement, you have an asset you own.

If you do this through your business, you do actually get the tax relief for the purchase of the car in the financial period in which you start the HP, not the end.

Leasing a car

With a lease, you (or your company) never actually own the vehicle. You are simply paying for the right to use it for a set period.

The lease can include maintenance, repairs, and tax, or you can choose to be responsible for these, but generally, you won’t have an option to buy the vehicle in a business lease.

What about PCP?

A PCP (Personal Contract Plan) is slightly different in that it works in a very similar way to a lease, but also includes a large final payment (often called a balloon payment) at the end of the agreement. You can choose to pay this and own the car, or alternatively just hand the vehicle back to the finance company.

The taxation of these methods is often very different, so if you are thinking about buying a new vehicle, speak to us first about how to structure the finance deal.
 

Will I pay personal tax on a car my company leases?

This depends on whether you use the vehicle for personal reasons, or only ever use it for work. Any personal usage of a company vehicle tends to be viewed as a Benefit in Kind; a perk or benefit an employee or director receives alongside their usual salary. These perks increase the value of the ‘package’ you receive, so you’ll normally pay tax on their equivalent value.

How much tax will I need to pay?

This is worked out based on the environmental impact of the vehicle and its original cost, so the most expensive and polluting cars will attract the most tax.

We give a more detailed example of how this works in our article about different types of company cars and tax. The short version is that you (as an individual receiving the perk) will pay income tax on its value, and the company (as your employer) will pay NI contributions on the value.

The benefits of leasing a vehicle through your limited company

Well, the first benefit is that the lease agreement is with the company and not you. If things go wrong and the business folds, then you have no personal liability to the lender.

Secondly, the lease payments are fully tax-deductible, so your company can claim these as expenses, which will help to reduce its tax bill.

Another potential positive aspect is that you’re more likely to offered discounts which aren’t available to the general public if you need to lease several cars. In that respect, leasing a car through your company can often make sense. If you fall in love with the car then there may be an option to buy at the end of the deal, but this isn’t always included.

Claiming VAT on a vehicle you lease for your business

If your business is VAT registered it will be able to claim back the VAT on the lease payments according to the vehicle’s usage:

• 50% if there is even a tiny bit of private usage (which is most likely to be the case)
• 100% if you only use the vehicle for business, such as a driving instructor or taxi driver might

The benefits of leasing personally

If you go for a personal lease, then the car has nothing to do with your business. There’s no company car tax to pay because it’s not a Benefit in Kind (because you own it, not the company).

Should you leave, sell, or close down the company, then the car stays with you. It’s worth noting that although you can claim for the business mileage from your company, this is all you can claim. Insurance, car servicing, repairs and so on, aren’t included.

How much mileage can I charge my company if I lease the car personally?

Leasing the car in your own name means you can charge the company for any business-related mileage you do in it. The rates vary depending upon the amount of mileage you do:

• For cars, the first 10,000 miles are paid at a tax-free rate of up to 45p per mile (and 25p per mile after that)
• You can also charge your business for mileage you do on your personal motorcycle (24p)…
• …Or even your own bicycle (20p)!

Leasing commercial vehicles such as vans and pickups

Commercial vehicles are treated a little differently. If you use a company van or pickup for any personal journeys (this includes going to or from work) then you’ll still have that personal tax to pay, but this is much lower than cars and easier to understand.

 
This single flat amount, known as the van benefit charge, is set regardless of the type of vehicle. You’ll pay your tax rate on this value so if you are a Basic Rate 20% taxpayer, then your annual charge will be 20% of the charge, which in this case is £834.

Company car tax made simple

We know that there’s a lot of information to take in there and the truth is that company vehicle taxation can be incredibly complex. The choice of whether to lease a car through your company or not isn’t simple, and what might be right for one person may not be right for one of their work colleagues.

We’d always suggest that when you own your own business, it makes sense to look at the issue in the round. That means everything from the Corporation Tax your company will save by providing a car, to the extra personal tax you’ll pay as a result.

 
Our team of online accountants can help you work through the best options for you. Call us on 020 3355 4047, or get an instant online quote.