Would it be more beneficial if I leased a car through my limited company?

We are often asked whether it would be cheaper to lease a car through a limited company. However, the answer isn’t always straightforward.

Leasing a vehicle can save you money and improve cash flow by taking the up-front costs and spreading them out over a contractual period and it also removes any concerns about depreciation.

But what is the benefit of leasing through your limited company?

Leasing a car through a limited company – the advantages and disadvantages

Benefits of leasing through a company include VAT relief and cheaper car tax, although this depends on the vehicle itself and how it is used.

For example, leasing a vehicle through a VAT registered company allows you to claim back 50 per cent of the VAT on monthly payments and up to 100 per cent of the VAT on the maintenance agreement.

In some cases, the cost of your lease payments can also be deducted for Corporation Tax purposes.

Lease hires are also considered “off balance sheet”, which means that the financial liability doesn’t need to be declared on the company’s accounts.

However, if you’re using the car for personal journeys, including commuting to and from work, car tax is a consideration.

The amount you pay is based on the emission score of your vehicle, the P11D value of your car, and your personal tax bracket, meaning it is worth shopping around for a low emission or electric vehicle to reduce the overall cost.

Car tax can also be reduced if you only drive the car part-time, or if you pay towards the cost of the vehicle.

Do note that if the business pays for the fuel used for personal journeys, you’ll need to pay tax on this separately. For more information about tax on company cars, visit the HM Revenue & Customs (HMRC) website.

Leasing a commercial vehicle through a limited company

One of the tax advantages to leasing a van can include claiming up to 100 per cent VAT back on the monthly payments, if you’re a VAT-registered business and it is only for business use. If there is any form of personal use you can still claim up to 50 per cent VAT.

You also do not have to report or pay anything to HMRC if your van is only used for business journeys or as a pool van.

If private use is included, depending on your tax bracket and the circumstances of the personal use, you’ll have to pay between 20 and 40 per cent on £3,500 – the current fixed rate of tax. You can find more information about this on HMRC’s website here.

Electric or hybrid vehicle from 0% Benefit in Kind Tax

Switching to an electric vehicle can bring significant tax benefits and businesses, and from April 2021, there is only a one per cent tax on Benefit in Kind for electric company cars during 2021/22. This lower rate also applies to hybrid vehicles with emissions between 1- 50g/km and a pure electric range of more than 130 miles.

If an employer provides an electric vehicle to an employee, then a benefit in kind arises, as with any other vehicle.  The value of the benefit in kind is calculated in the same way as for other company cars, however, there are some differences for pure electric cars.

The rules regarding benefits provided through an “Optional Remuneration Arrangement” (eg salary sacrifice) do not apply for ultra-low emission vehicles, being vehicles with Co2 emissions of 50g/km or less.

In order to encourage the use of electric and hybrid vehicles, there is an exemption from a benefit in kind charge for workplace charging of such vehicles (whether they are company vehicles or vehicles owned personally by the employee).  The exemption covers the cost of electricity, the cost of the employer providing the facility any connected services.

It should be noted that the exemption does not cover reimbursement of an employee’s personal expenditure away from the company’s premises (for example if the vehicle is charged at the employee’s home or at a service station).

In order to qualify for the exemption the following conditions need to be met:

  • There must be a dedicated charging point (designed for purpose)
  • The charging facility must be at employer’s premises and has to be available to all employees
  • The car or van must be driven by the employee or the employee has to be one of the passengers

Leasing a car personally

To evaluate the benefits of leasing a car through your limited company, it’s worthwhile considering the advantages and disadvantages of leasing a car personally, to build a picture of how this will suit your requirements.

The two key advantages of personal leasing include not having to pay company car tax, while Vehicle Excise Duty (or road tax) is sometimes included in the lease.

You can also claim back mileage for any trips made in the vehicle for purely work purposes (again, this does not include commuting to and from work) – find more about the rates here.

However, you won’t benefit from VAT or Corporation Tax relief.

How should I proceed?

Generally, a more economical vehicle (one that has low emissions) will be cheaper to lease through a company, but that’s not necessarily always true.

To evaluate the best way to proceed for you and your business, speak to our expert team at Macalvins today.

Posted in Business, Employee Benefits, Value Added Tax.