Do you need a new set of wheels? Whether you are getting a car for your small business or just for personal use, it is a large expense. Instead of buying a new ride, more and more people are opting for a lease.
The UK has become the third-largest vehicle leasing market in the world. But when we factor in taxes, does leasing a car make more sense than buying it? The answer may not be so straightforward.
How Does Road Tax Affect Purchasing and Leasing a Car
To figure out what’s the most tax-efficient way to get a new ride, first you need to learn a thing or two about road tax. Vehicle Excise Duty (VED), popularly known as road tax, is a periodic tax that the government levies as excise duty. Car owners are legally required to pay VED in the UK.
Currently, the road tax is based on CO2 emissions. Essentially, the less CO2 a car emits, the lower the VED the car-owner has to pay. For the first year of the car being registered, the rate of tax can range from £0 to £2000.
The responsibility to pay the road tax is entirely down to you if you purchase a car outright. You also must pay the VED if you pay to take ownership of the car through options like Personal Contract Purchase.
If you lease a car, you won’t be its legal owner—the lender will be. So, you won’t be legally required to pay the road tax—the lender will be.
However, most lease companies roll the road tax into their customers’ monthly payments. So, essentially, you’ll still be the one paying the road tax if you lease a car, you just won’t have to do it separately. When it comes to VED, leasing a car generally isn’t necessarily more tax-efficient than buying it, but it is still much more convenient.
However, there are cases when it could be much more tax efficient. Cars that emit higher levels of CO2 often see VED increases, and that trend will continue in the future. To shield their customers, some lease providers typically absorb the first-year rate.
Depending on your lease provider, your monthly lease payments may remain unaffected by VED increases for your type of vehicle.
So, if you decide to lease a car and get a lease company to handle all the paperwork, you still want to check your contract. With the right leasing company, leasing a car can indeed be more tax-efficient than buying it (in terms of VED).
If you want to buy or lease a personal car as a private individual, this is definitely something to consider. However, there’s also the question of VAT, which leads us to our next point:
Lease or Buy a Car Through My Limited Company?
If you are a private individual that wants to buy or lease a car for personal use, you won’t be able to reclaim VAT. If you have a VAT registered business, it’s a different story. But, the question still remains: should you buy a car privately, use the mileage allowance, or lease a car through your company?
In terms of tax efficiency, the key factors are:
- Personal tax considerations
- CO2 emissions of the car
- Business or personal use
If you are VAT registered on the cash accounting scheme or standard accounting scheme, you can reclaim 50% on the lease amounts. If you’ll use the car strictly for business purposes, you may be able to reclaim 100% of the VAT.
Your business can recover VAT on everything related to repairs or servicing. As for the annual lease amount net of VAT, you can claim corporation tax relief.
Let’s say you lease a car through your limited company for £10,000 per annum plus VAT or £833 per month, and you plan to use it for personal use as well. You can reclaim 50% of the VAT of the lease amounts:
- £10,000 x 20% x 50% = £1,000
Let’s not forget the corporation tax your company can claim on the annual lease amount at 19%
- £10,000 x 19% = £1,900
So, you can reduce your corporation tax bill by £1,900 if you lease a car for £833 plus VAT per month. However, keep in mind that this will be the case only if the amount of CO2 your car emits is lower than 130g/km. If the CO2 emission of the car is higher, you can claim only 85% of that amount (£1,900 x 85% = £1,615).
Unless you use the car solely for business purposes (and are able to prove it), you won’t be able to reclaim any VAT on the purchase of the car. However, If you use it only for business, you may be able to reclaim 100% of the VAT. You will also receive tax relief on the running costs of the car.
If you purchase a car through your limited company, you will be able to claim a writing down allowance (WDA). The amount of WDA you can claim depends on the CO2 emission of the car. You may be able to write off the full cost of the car as an expense in the first year if it boasts very low CO2 emissions.
What About Personal Tax?
If you buy a car through your business, but use it for personal purposes, HMRC will classify it as a benefit in kind. In other words, you will have to pay a tax for the private usage of a company car.
According to HMRC, commuting also falls under private use. The amount of tax you would be required to pay would depend on the CO2 emissions of the car and as well as the price of the car. And all of this goes for both purchased and leased cars.
How About Mileage Allowance?
Another option you have is to buy the car personally and claim the mileage allowance. This has no personal tax implication and is a fully tax-deductible expense. For the first 10,000 miles in the financial year, the rate per business mile is 45p. Above 10,000 miles, the rate per business mile is 25p. If the car is leased, you cannot claim mileage allowance because you don’t own it.
So, which option is more tax-efficient? As you can see, this is a complex area with many variables at play. If you want to get a new car in a tax-efficient way, your best bet is to consult an accountant about your specific needs.