Are Car Lease Payments Tax Deductible?
When you lease a car through a Personal Contract Hire (PCH) agreement, the monthly price quoted will be inclusive of VAT, which will be charged at 20% of the total cost of your agreement. On the other hand, business leasing allows you to claim back up to 50% of tax on the rentals and up to 100% on a maintenance package. However, you’ll need to qualify for a business lease before being able to take out a deal.
So, do private journeys in a company car impact how much tax you pay? And is this the same if you use your own leased vehicle for work purposes? Discover everything you need to know about tax deductions for leasing agreements in this guide.
What is company car tax?
Because a company car is considered a benefit supplied to employers, those using it are obliged to pay benefit-in-kind (BIK) tax. Essentially the value of the vehicle is added to your salary and then tax is calculated from this total.
The percentage of company car tax you pay will depend on a number of things, including:
- How much CO2 the car emits (the less polluting a vehicle is, the less BIK tax you will usually pay)
- How often the car is used
- What fuel type the vehicle uses
- List price
- Make and model
Can I get tax relief for my lease car?
Although personal car leasing won’t automatically guarantee you tax deductions on the hire cost, you may be able to claim back on expenses if you’re using the car for business purposes. This doesn’t include commuting to and from work, but journeys which you’re obliged to do in order to carry out your job. In this case, there’s a good chance that you can claim a deduction from your income. This then reduces your taxable income and the amount of tax you’ll need to pay.
Remember: You may have to make a claim in order to benefit from this tax deduction.
As previously mentioned, business leasing can provide considerable tax benefits. You can claim back up to 50% of the tax on the monthly payments of your lease, up to 100% of the tax on a maintenance package and, depending on the vehicle’s CO2 emissions, costs of leasing can be deducted from taxable profits if the vehicle is considered a company car.
That said, if the vehicle is being used by an employee for both private and business use, they will be charged a small benefit in kind tax based on the CO2 emissions of the vehicle and it’s retail value. However, this is currently very low for vehicles which emit 50g/km of CO2 or less and isn’t charged for electric vehicles.
In order to qualify for business leasing you must use the car for primarily business purposes and work for a VAT registered organisation. This means that the car may be used for personal use, as long as at least 50% of the driving is business related.
Remember: Any personal mileage needs to be tracked to the mile and will be charged at the end of the agreement at a fixed rate.
Similar to company cars, pool cars can be covered by a business lease and provide the same tax benefits. However, there is an important distinction between the two that could lead to your business being fined if misunderstood.
Unlike company cars, pool cars can not be used for private use and are solely for business purposes. They must also be kept on company grounds overnight at least 60% of the time (an employee may be allowed to take the vehicle home if its used for an early morning business trip or if their premise makes the vehicle available to employees). This therefore means that employees do not need to pay any benefit in kind tax as the vehicle isn’t deemed as a perk, since there is no element of personal use.
However, incorrectly describing a company car as a pool car on a tax return can have serious financial consequences. You could be liable to fines of up to £3000 per annum, per employee, as well as further penalties due to potential loss of income to HMRC.
When it comes to personal leasing, you may be able to claim back tax if you are a taxpayer and your vehicle is used for business purposes outside of commuting to and from work.
A statutory system of tax-free approved mileage is in place that allows you to claim back a fixed rate amount based upon the business mileage you have done in your personal vehicle. The allowance is currently set at 45p per mile for the first 10,000 miles and 25p per mile thereafter, and you can claim back a percentage of the total.
In order to qualify, you must be a taxpayer yourself and the business must not fully reimburse you for your business mileage. If you are partially reimbursed by your employer, you will still be able to claim back the difference.
For example, an employee that drives 12,000 business miles can claim back 10,000 miles at 45p (£4,500) and 2,000 miles at 25p (£500) for a total of £5,000. If your employer doesn’t currently reimburse you for mileage you would be able to claim back £1,000 if you pay basic rate tax, or £2,000 if you are a higher-rate taxpayer. However, if your employer reimburses you at a rate of 20p per mile (£2,400), you will only be able to claim on the difference (£2,600), which would mean you could claim back £520 at the basic rate or £1,040 at the higher-rate.
Remember: There is no National Insurance relief with personal leasing.
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Many business customers and self-employed tradespeople look to van leasing as a way of getting big vehicles for affordable monthly payments.
Van tax rules apply to vans, pick-up trucks and light commercial vehicles which fit the following criteria:
- Are used for transporting goods/burden
- Have a total vehicle weight of 3,500kg or less
The rate of BIK tax for vans is fixed at £3,430 for this tax year and 2021/22. If you’re a 20% taxpayer, this will be £686 (or £57 per month) and £1,372 for higher-earning 40% taxpayers (or £114 per month).
Fuel benefit tax for vans is also charged at a fixed rate of £655. Again, if you pay 20% then this will be £131 (or £11 per month) and £262 for for those who pay 40% (or £22 per month).
However, for business leasing the rental payments are treated as a tax-deductible expense in the accounts. As long as you have used the van for work journeys, you will be able to reclaim the VAT on the payments when you’re charged by the funder.
How to reclaim tax on a lease car
In order to make tax deductions on a leased car you need to submit a final VAT return form to HMRC which can be done either online or via compatible accounting software. When filling in your form you must account for any personal miles which may have been put on the car by employees, as you will either only be able to reclaim VAT for business mileage or reclaim VAT for all mileage but need to pay a fuel scale charge.
That said, if you’ve only done low mileage and used the car for both private and personal use it may be more beneficial to choose not to claim back VAT. However, if you have more than one company car and decide not to claim VAT on one, you won’t be able to claim back VAT on any of the others.
How to reduce tax cost on a car lease
While VAT is charged at a fixed rate, there are ways you can configure a lease agreement so that you can reduce the amount of tax you need to pay.
Be selective with the vehicle make and model
Vehicle make and model play a pivotal role in determining how much tax you’ll need to pay throughout your lease. This is because since VAT is charged at a fixed rate, the less you have to pay over the contract term (including initial rental and monthly payments) the less tax you need to pay. This can easily be demonstrated with an example and here’s how monthly payments can affect the amount of tax you pay:
A BMW with monthly payments of £185 a month, will cost you £37 a month in tax. This is considerably more than if you were to get a Citroen at £115 a month, since you will only need to pay £23 a month.
Moreover, due to the fact that retail value and CO2 emissions affect the benefit in kind tax/ taxable profit deduction, it may be more advantageous to choose an alternatively fueled vehicle (or at least one with lower CO2 emissions) as well as a less luxurious model.
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Choose a car with low emissions
As we mentioned earlier, vehicles that produce less CO2 are subject to a lower percentage of BIK tax. To incentivise drivers to make the switch to all-electric models, the Government has updated the rates for 2020 so that no tax is payable on these vehicles.
This will increase to 1% in 2021 and 2% in 2023, although this will still be the lowest bracket of any existing car on the road.
You can see the full BIK rates from 2020-2023 here.
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Want to learn more about getting your finances in order when considering a new car? Head over to our car finance and leasing guides to find out everything you need to know.