Finance Lease
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TEN years ago, the idea of doing anything other than buying a car would have legitimately questioned.

However, as society moves away from purchasing outright, more flexible options such as car leasing have increased in popularity.

Personal contract hire deals have been quite common for some time now, with individuals choosing their annual mileage, length of lease and driving away in a nice new car that doesn’t cost them in the long-term through depreciation.

Businesses have followed suit, looking to lease fleets of vehicles to offer to their employees through company car schemes. Sole traders and smaller business have also looked at leasing as a viable alternative to purchasing vehicles for business purposes, but is it better to lease a car personally or through your business?

Leasing through your business

Many business owners will assume that leasing a car through their business is the best and most cost-effective way of driving a new car.

Firstly, lease deals for business users tend to be more affordable as, if you’re leasing the car through a company that is registered for VAT, you can claim 50% of the VAT of the monthly payments and all of the VAT of the maintenance agreement.

For example, if your lease car costs £250 a month, you’ll be able to make savings of £50 per month by leasing through your VAT-registered company.

You will obviously have to pay company car tax, but is cheaper than personal car tax in many cases so savings can be made in this area.

Company car tax is calculated using the CO2 your car emits, the P11D value of your car and your own personal tax bracket. If you’re happy to drive an economical, inexpensive car then you can save on the amount of tax you’ll pay.

If you want to lease a van or pickup, the amount of company car tax you will have to pay is worked out using a fixed rate, rather than using the CO2 and P11D value. The fixed rate for the 2019/20 tax year is £3,430. You’ll pay either 20% or 40% of that depending on your own personal tax band.

In terms of cash-flow, leasing a car frees up cash in the sense that you don’t have your money tied up in an asset that will only depreciate over time.

Another point to consider is that the financial commitments of a business lease are “off balance sheet”. This means that they don’t have to be included in your company’s accounts, which can be a rather attractive benefit to business owners.

What about leasing privately?

If you want to look at a personal lease, rather than leasing the car through your business, you can enjoy benefits that you wouldn’t get from a business lease.

Firstly, you can use the car freely for both business and personal use, without worrying about incurring any company car tax. If you lease a car through your business you will have to pay company car tax if you use it for personal journeys which, somewhat frustratingly, include travelling to and from your place of work.

To avoid paying any company car tax you would have to leave your car at your place of business overnight and use a personal car to travel to and from work. Pool cars used by multiple staff members are also exempt, as are company cars adapted for motability.

If you do lease privately you obviously won’t have to pay company car tax, although you would have to pay the VAT in full, rather than be able to claim it back through your business.

If you lease privately then you will have to keep records of your business mileage, as you can claim mileage expenses through your business at the rate of 45p per mile for the first 10,000 and 25p per mile thereafter without being taxed further.

Of course, one of the most attractive things about leasing your car personally is that you can get to drive a brand new car every 2 or 3 years.

You don’t own the car, but then you don’t have an asset that’s decreasing in value with every mile that you drive. The company you lease the car from has to worry about future value, not you.

You’ll often find that if you lease a car you can afford a much nicer model as it’s usually cheaper than buying a new car outright.

If you lease a car personally then you don’t have to worry about the CO2 emissions or P11D value either so you could get that sports car you couldn’t get if you leased through your business.

So what should you do?

There are pros and cons to leasing privately or through a business and what is better for you really does depend on what you want from your car.

If you want to lease a car that emits a lot of CO2 and has a high P11D value then leasing that car personally is probably the better option, as you’ll avoid paying a lot of company car tax.

However, if you’re more interested in hybrid or electric vehicles, then it probably makes more sense to lease through your business as you’ll pay much less company car tax and will be able to make additional savings through VAT.

If you’re certain that you want to lease through your business but don’t want to be hampered by vehicles with high CO2 and P11D then it may be worthwhile looking at leasing a van or pickup as the amount of tax you’ll pay is fixed whatever vehicle you choose.

In reality there are benefits to leasing both personally and through your business and it really comes down to what you want from your car.

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