The question of whether you should lease your car through your limited company or personally can depend on a number of factors

Many business owners are often unsure whether it’ll be more tax efficient to lease the car personally, or through their limited company. Choosing the wrong option could be a costly mistake, and we know that no one wants to end up paying too much tax

Unfortunately, there’s no correct answer in this situation. The best option depends entirely on your business circumstances, and it’s worth noting that both options have positives and negatives

There are two options when it comes to leasing your car:

Leasing through your limited company: this means leasing the car through your business. The business will pay the rental monthly and you will pay benefit in kind through your tax code

Leasing personally: the car has nothing to do with your place of work or business. The payment comes out your own personal account.

Leasing through business

If you lease the car through your business, you can claim back 50% of the VAT on cars and 100% of the VAT on vans (provided the van is just used for business use)

The monthly contract hire payments made during the year can normally be fully offset against the business’s taxable profits for corporation tax purposes. However, there are a number of issues and impending changes which should be taken into consideration.

The payments are not fully tax deductible if:

The car has CO2 emissions over 110g/km (this has recently reduced to encourage companies to select cars that are “greener”

The rentals aren’t evenly spread over the life of the lease, or

The lease has clauses that may allow the company to eventually own the car.

From April 1st 2018, cars emitting 111 g/km or more of CO2 will be subject to a 15% tax disallowance on the amount of the rental that can be claimed against the business’s taxation. Only 85% of the value of the car leasing costs qualify for tax relief against corporation tax. This new threshold replaces the 130g/km threshold which has been in place for several years – existing cars will not be affected. (all figures correct as of April 19)

For cars contract-hired by the business with a CO2 output of 110g/km or below, there will be no disallowance. Tax relief on the car leasing costs can be fully allowed against taxable profits – making business contract hire very tax efficient on these types of cars

This does mean, however, that capital allowances cannot be claimed as well. These stay with the owner of the vehicle, in this case the contract hire company.

Benefits of business contract hire

Tax-efficiency with Corporation Tax and VAT benefits

Off-balance sheet funding for most organisations (see below re off balance sheet funding)

Improved cash-flow with minimal capital expenditure

Known fixed motoring costs for the contract period, leading to accurate budgeting

Optional monthly maintenance charge covering routine maintenance and servicing costs, to smooth out motoring expenditure even further

Low risk with no uncertainty over future residual values, nor the hassle of disposing of the vehicle

Reduced in-house administration, freeing up staff time

Optional breakdown and replacement vehicle cover

Road Fund Licence provided for the duration of the contract

Off balance sheet funding

For years this has been put forward as a benefit of taking contract hire when strictly that wasn’t the case. It did help in the calculated gearing of a business but there were concerns it didn’t show a true reflection of a business liabilities.

However, a new international lease accounting standard, IFRS 16 Leases, came into play from January 1st 2019. This covers the future accounting treatment of leased assets, including those on contract hire. Whilst adoption of the standard isn’t expected in the UK for another four or five years, it is worth starting to consider it with most lease agreements running for 3 year periods.

In its international format, the new standard is intended to bring all assets on leases of more than 12 months duration onto a company’s balance sheet, giving a more complete picture of a business’s financial commitments.

This new approach will have different implications for different companies depending on factors such as size, profitability, attitude to risk, ownership of assets and a host of other issues.

Benefit in kind tax

If you drive a car that has been provided by your employer or you have taken it out through your own company, and you can use that vehicle for personal transport outside of work, then it’s considered a company car and is seen as a taxable perk by HMRC.

Officially a company car is known as a Benefit In Kind (BIK), because there is a monetary value attached to your ability to use it privately. HMRC view it as an additional bonus on top of your annual salary, because the car is paid for by your employer in addition to your standard pay.

As a result, there is tax to pay. The easiest way of calculating how much tax you will have to pay on a company car is to visit the HMRC website, where it has a company car tax calculator with plenty of additional help to ensure you’re paying the right amount of tax.

HMRC works out the amount of BIK tax you pay based on the amount of CO2 emissions a car emits. There are 21 emissions bands, starting with vehicles that emit 0-50g/km, ranging up to those models emitting 180g/km or more, and the amount of tax you pay is a percentage of the car’s list price, which HMRC refers to as the P11D value. This is the price of the car with optional extras included, but minus the non-taxable parts of the vehicle, including the first year’s VED (road tax) and its first registration fee. The P11D value is determined by the list price quoted by a manufacturer, so even if you get a discount on a new car’s list price, the P11D value will remain unchanged.

How much company car tax will I pay?

The amount of company car tax you actually pay is dependent on your annual salary. For example, if you fall into the 20 per cent income tax bracket, you’ll pay 20 per cent of the taxable portion of the car’s P11D value. Those in the 40 per cent tax bracket, meanwhile, pay 40 per cent on the taxable chunk of the P11D. This will usually be deducted from your monthly pay packet.

Here’s how to calculate your company car tax in three simple steps:

Take your company car’s P11D value (for example £30,000)

Multiply this value by the car’s company car tax rate which is dependent on CO2 emissions (for example 15%) to get your BIK amount

Multiply this BIK value by your personal tax rate – 20%, 40% or 50% – (for example 40%). This will be the amount of company car tax payable. So:

£30,000 x 15% = £4500 (BIK amount) x 40% = £1800 per year (or £150 per month)

Company car tax: petrol vs diesel

Diesels carry a four per cent surcharge over petrol models with similar emissions, because they emit greater amounts of harmful particulates. So if you’re choosing between petrol and diesel for your next company car, you’ll need to work out whether or not you cover enough miles in a year to cover the extra cost of a diesel company car in the first place.

Summary

Overall if you are a business owner you have to weigh up the cost to your business if taking a lease through the company versus the cost of taking a car personally. We are here to help with this, get in touch and we can go through all the figures. We have found that taking personally and paying yourself a mileage allowance (According to the current AMAP rates, you can claim 45p per mile on the first 10,000 business miles and 25p per mile on anything over this limit.) tends to work best but every situation is different