Do You Pay Taxes On A Leased Car?

If you’re leasing a car as a private individual through a personal lease, you will be required to pay VAT (value-added tax) at a fixed rate of 20%. The monthly rental payments will include this additional cost, which will be spread across your contract.

VAT-registered companies can reclaim up to 100% of the tax on vehicle payments on a business lease and on any maintenance package chosen.

Are there any other taxes on leased cars? And what’s the process of reclaiming tax you don’t need to pay? Read on to find out all you need to know.

Lease car taxes

VAT

Every new car is charged with VAT included, which will be a fifth of the total cost of the vehicle. Because lease cars are mostly always brand-new (unless you choose to lease a second-hand ‘ex-demo’ vehicle) you’ll be required to pay this tax across the course of your contract length.

However, this will only apply to you if you’ve chosen a personal agreement when leasing a car. Or, if the vehicle you’ve leased for business use has done private journeys, in which case a calculation of these miles will need to be made. These additional miles will then be subject to the standard VAT charge.

See below for an example of how the taxes will look on a standard personal contract hire (PCH) lease.

VAT

Regardless of which vehicle you choose, the rate of VAT charged will be the same.

Let’s say you see a Seat Ibiza advertised at £188 per month* plus VAT on a personal lease and £156 per month* for a business agreement.

The difference each month is £32, which is the tax payable for using the car for solely private journeys.

Over the course of your lease term, this will be a total of £1,152, albeit this is reduced to an affordable extra monthly amount.

What’s more is that we calculated** the amount you would lose from depreciation if you were to buy the same Seat Ibiza and have it for three years and drive 8,000 miles each year. We found that you would lose an average of £169 of the car’s value and a staggering total of £6,081 (33%) of what you paid for it, which is around £18,285.

So, while VAT may seem costly, you’re in fact saving £137 each month over your lease term than if you were to own the vehicle.

*Prices are examples used from existing data on Moneyshake when a 3-month initial rental, 36-month contract and 8,000 miles is specified.

**Depreciation stats were reported from themoneycalculator.com and are accurate as of 21/02/2020.

Road tax

car tax GOV
Copyright © GOV.UK

Depending on your chosen provider, you may need to factor in the cost of road tax (also known as ‘Vehicle Excise Duty’) for your new car. Most of them will offer it for at least the first 12 months, while others extend this to the entire lease term.

As the registered owner and keeper of the vehicle, the finance provider will have the documents necessary to tax a car (either the VED V11 or V5C log book).

Each vehicle will have a different rate for road tax, with bands created for petrol and diesel cars, as well as alternative fuel cars (e.g. electric, hybrid, hydrogen). This is worked out by using the amount of CO2 emissions to determine how much of a burden each motor is in relation to pollution.

At Moneyshake, all our lease deals come with road tax included for the duration of the contract, regardless of whether it’s two, three or four years long.

Do I pay taxes on a business lease?

Business leasing is becoming increasingly popular with SMEs (small-to-medium enterprises) due to the tax relief benefits, which are visible on most advertised deals.

Look on any comparison website for vehicle lease deals (including Moneyshake) and you’ll notice that the monthly payments for business contract hire (BCH) agreements are advertised as cheaper than PCH for the same vehicle.

This is because businesses can reclaim 50% of the VAT on the monthly rentals if the car has been used for personal journeys. If it’s only be used for business purposes, this rises to 100%. If you wanted to take out a maintenance package for the new company car, you’ll also be able to get a full return on all the VAT in place.

How do I reclaim the tax on my business lease?

Reclaiming VAT on your lease agreement is pretty straightforward because the tax amount is added onto the monthly payments. All you need to do is submit a VAT return.

This will involve giving your account details to HM Revenue and Customs (HMRC), even if you’ve already got a direct debit in place for VAT returns. In order to do this, will need to set up an online VAT account, which can be accessed to show you any refunds you’re owed.

Remember: Refunds usually take 10 days of HMRC receiving your return, but it can take longer, and you should only contact them if you’ve not heard anything after 30 days.

Are you ready to find a brand-new car? You can find your perfect new car for affordable monthly payments with Moneyshake lease deals. Start your search and compare prices now.

Want to know more about car finances? Head over to our guides page for all the information you need.

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