Your options when it comes to leasing a car are a personal contract hire or a business contract hire. A personal contract hire is registered under an individual, whilst a business contract hire is a vehicle lease for a sole trader, limited company, LLP, partnership or charity. As a small business or startup you might be considering what is the better route to go down if leasing is an option for your business. Whilst both options are technically available, there are better tax incentives for leasing a car through your business than doing it personally.
What is Leasing?
Many businesses lease the tools and machinery they use and some lease their office space. In any case, when you or your business lease something you will never actually own it, no matter how long you are contracted to use it for. This is no different with a car lease. When you lease a car you drive the vehicle for a contracted length of time and return the vehicle at the end of the deal. You’ll pay an initial rental fee, which is essentially a deposit, and pay fixed monthly rates for the duration of the lease contract.
Lease deals typically run from anywhere between 12 – 60 months and are popular for people who want to drive new cars and the latest models without the depreciation and resale issues that come with ownership. Car leasing is a cost efficient way to be able to offer new company cars as a benefit to employees.
Difference Between Personal and Business Contract Hire
Whether you lease through a personal or business contract hire, the ‘contract hire’ part of the lease remains the same regardless. The difference is that you can claim VAT back on payments made for a business contract hire. For a personal contract hire you will pay VAT as you do on any other purchase, but if you lease a vehicle through your VAT registered company you can claim as much as 100% VAT back on your leasing fees.
If the car has scope for personal use or is driven by any member of a family or household, you can claim back just 50% VAT on all monthly lease fees. On the other hand, if the car is strictly for business use and is not used for commuting or by family, the business is able to claim back all of the VAT charged on the monthly leasing fees. Your business will also be able to claim back all the VAT charged on any additional maintenance packages you’ve purchased for the lease vehicle regardless of whether the vehicle is used for personal reasons as well as business.
These tax benefits mean that a like-for-like lease deal would be cheaper if it was leased through a VAT registered business than with a personal contract hire. A personal lease will mean you’ll pay full VAT on all payments made for a personal contract hire, just like you would on any consumer purchase.
Company Car Tax
You will be required to pay company car tax if the car is leased through your business, but this tends to be a better deal for business users as company car tax is often cheaper than personal car tax. Company car tax is calculated as a percentage value of the car’s P11D value, using the carbon emissions of the vehicle and the personal tax bracket of the driver to calculate the final tax bill.
It’s also worth pointing out that under new revised tax ruled for 2020/2021, electric vehicle drivers will pay no company car tax at all and will pay markedly lower tax rates over the next three years. If you operate a company van or pickup, company car tax works slightly different and is calculated at a fixed rate.
Should You Lease a Car Personally or Through Your Business?
There are clear tax incentives for a business contract hire compared to a personal lease and this can save your business money as your fleet grows in size. A business lease is cheaper still for a sole trader or the self-employed leasing a car through their limited company. Regardless of the size of the business there are healthy incentives in place to opt for a business lease. But how much you are able to save on tax will be dependent on how you use the vehicle.