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Why contract hire can save you money

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New tax rules: make contract hire tax-efficient

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21 August 2009

Two business directors discuss the new tax rules on contract hire
New tax rules: make contract hire tax-efficient

ASSUMING you had the opportunity to set all your motoring costs against the business, you would. Wouldn’t you?

Perhaps because you always buy your cars you’ve never thought of leasing them. But owning your company cars – is that always a good idea? After all, you’re locking up all that capital in a car – an asset that depreciates.

But since April 01 this year, all new business car expenditure that uses contract hire can be set against your profit and loss account.

Well, that’s not quite true – if you contract hire a business car with emissions above 160g/km of CO2, then there is a 15% restriction applied to the amount you can claim. But it still doesn’t sound like such a bad deal does it?

So what has changed to make contract hire so attractive to small businesses?

From April 01, the government changed the way you calculate the cost of the car against tax. This is because it wants us all to drive cars with the lowest emissions possible.

So it dispensed with the old method of half the excess rule – known as the Expensive Car Leasing Disallowance – and introduced a disallowance based on the CO2 emissions of your company car.

So there is no disallowance in place for cleaner cars on contract hire; ‘dirtier’ company cars on contract hire have a 15% disallowance.

Here’s how the contract hire leasing disallowance works

  • Cars with emissions of 160g/km and below will be able to set 100% of the net contract hire rental against tax.
  • Cars with emissions of 161g/km and above will be able to set 85% of the net contract hire rental against tax.
  • If you lease second hand or nearly new cars, the same rules apply.

If you would like more detailed information, then download our The Big TAX Change factsheet. It has everything you need to know. You can download it for free by clicking on this highlighted link The BIG tax change (PDF 518KB).

Baffled by contract hire?

Contract hire is an agreement to lease a car over an agreed period of time (expressed in months) and distance (expressed in miles). Usually the period is three (36) or four (48) years. The distance is normally 10,000 miles per annum – although higher mileage drivers will have to allow for more. Typically you will see 36 months/30,000 miles as a way of expressing the lease contract term.

You pay a monthly sum (the lease rate) and then at the end of the contract you hand the car back. And start a new contract hire lease. Half of the VAT may be reclaimed; if there is no private mileage then 100% VAT can be reclaimed.

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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