Tax benefits of leasing a car for businesses

What are the tax benefits of a business lease?

Taxes – no one likes them, no one likes dealing with them, overall, not a fan favourite.

But taxes when it comes to business leasing? Slightly more likeable. In fact, there are some great tax benefits to business leasing.

For employers, whether you’re looking to lease a car through your business or offer your employees a company car or as part of the salary sacrifice scheme, there are big financial advantages to gain.

There are huge VAT savings to be made on your monthly payments by opting for a business lease deal. 

Christmas really has come early.

We'll talk you through the details of leasing for businesses, so you have a clear understanding of your monthly outgoings and potential savings. 

From Benefit in Kind (BiK) to National Insurance, a business lease can come with a hefty amount of tax implications. But don’t fret, we’ll show you the tricks of the trade.

Tax benefits of business car leasing

Let's pop the bonnet and take a look at the tax advantages of business leasing, and we'll throw in some other perks too.

After all, we're not just about saving you money on tax – we're about keeping more of your hard earned cash where it belongs.

But don’t worry, we’ll dive into these benefits and some frequently asked questions in more depth later on in the blog.

Here's why financial directors and fleet managers alike are shifting into the business leasing lane.

Save on VAT

You can claim back a whopping 100% of VAT on your lease car.

Even if your car doubles as the weekend getaway car, you can still claim back a solid 50% of the VAT – some pretty good savings still.

Tax deductions

Depending on the CO2 emissions of the car you’ve chosen to lease, you can offset up to 100% of the lease costs off your business taxes. Just another reason to step into the world of electric vehicle leasing.

For vans, leasing is much more forgiving. No matter the emissions, 100% of the cost can be offset against your tax bill.

Better cash flow

Why blow your budget on big upfront payments when leasing lets you keep cash in your pocket for other exciting business plans? 

Plus, leasing keeps your credit lines open for more exciting business ventures.

Hassle-free budget

With fixed monthly costs, you don’t need to spend time and energy on worrying about depreciation and resale value. 

And at the end of the lease? Just hand back the keys and you’re ready to go again.

What to consider when taking out a business car lease

Offering company cars to your employees is a great way to get the ‘best boss’ accolade. 

Leasing isn’t all sunshine and rainbows though. As the employer, you will be expected to pay a tad more National Insurance, and your employees will also have to pay Benefit in Kind tax.

But the financial freedom that comes with leasing a car for your business is a total game-changer. You’ll forget all about other financing options by the end of reading this blog.

For instance, if your vehicle is strictly for business use, you can write off 100% of the VAT and chalk up the lease payments and costs as a business expense. 

That’s some serious tax-friendly magic right there.

Going for a new car or van over a used one is also a win for your wallet. Newer vehicles tend to behave better – less downtime, fewer repairs, and way less hassle.

If you don’t budget, things would get out of hand pretty quickly – not just in your personal life, but in business too. Although a popcorn machine would be great for the office, I doubt many businesses budget for it.

The budget needs to consider all aspects of the business to make sure targets are met and profits made.

Faffing over depreciation costs, service costs, and MOTs, for varying cars you may have in your fleet... This can add a real admin headache.

Luckily, leasing covers all of these costs with a fixed monthly payment, without the resale stress. Super simple, right?

Oh, and did we mention? 

Leasing means you get to enjoy the latest tech, in the latest cars, which to be quite frank, are downright fun-to-drive. So, what’s not to love?

Are business car lease payments tax deductible?

The short answer is yes. If you run a business, you can use the cost of leasing a car to lower your taxes.

For Limited Companies – your monthly lease payments can reduce your Corporation Tax.

For Sole Traders or Partnerships – you can use lease payments to reduce your annual tax bill.

But are all cars tax deductible? No.

An electric car lease is. Both business and personal electric leases are 100% tax deductible. The government are very keen for the EV revolution with the impending 2030 petrol and diesel ban getting ever so closer.

Who doesn’t love 0 g/km CO2 emissions? Better for your taxes and the planet, a win-win.

Petrol, diesel, and plug-in hybrids? 

If they emit less than 110 g/km, the car is still completely tax deductible. Cars emitting 111 g/km of CO2 or more are still tax deductible but only up to 85% of its value, this rule was introduced in 2018.

Van leases, however, don’t apply to this, you can offset 100% of the cost regardless of the lease van’s emissions.

However, when leasing a car you can’t claim Capital Allowance as you don’t own the car.

Can you claim back VAT on your car lease payments?

First things first, you have to be VAT registered to claim back VAT on your lease car payments.

If your car is purely for business purposes, then you can claim 100% VAT.

If you use the car for both business and fun, then 50% VAT can be claimed.

Let’s talk service charges – excess mileage charges and maintenance packages, for example, are another opportunity for tax benefits for you. We are just spoiling you now.

You can claim back 100% VAT on service charges, and (yes it gets better) offset 100% of the charges against your annual tax bill too – pretty good right?

At Carparison, we’re always trying to make life easier for you, we offer all our customers the option to add a maintenance package. This agreed payment gets added on to your monthly lease payments.

How easy is that?

This includes things like scheduled services, tyre repairs, and MOTs (if your lease goes beyond the 3-years of no MOTs).

Making budgeting quicker and easier for business vehicles, this can be invaluable, especially in this ‘cozzy livs’ (Cost-of-Living crisis, for those who aren’t on social media).

There’s not much else you need to worry about apart from fuel or electricity.

Leasing has got your back.

Can I lease a car through a limited company?

If you’re the boss of a Limited Company, that means you can utilise a lovely Business Contract Hire (BCH) deal through the company.

But here’s the deal: if you take your company car on personal adventures – school runs, beach trips, or late-night snack missions – you’ll need to pay the Benefit in Kind (BiK) tax. 

Basically, the taxman’s way of saying, “Nice car, mind if I tag along?”

That being said, leasing through your Limited Company has some pretty cool perks if we do say so ourselves – like lower corporation tax and claiming back VAT.

Considerations for business leasing

We’re a transparent company through and through, so we wouldn’t be doing ourselves a justice if we didn’t dive into some of the considerations.

When offering business lease company cars for your team, it comes with a higher National Insurance contribution.

This doesn’t compare to the savings already discussed – but sadly there’s a small price to pay for your crew driving in style.

Meanwhile, your employees will also chip in with some BiK tax to cover the extra goodies they’re enjoying alongside their paychecks.

How much Benefit in Kind (BiK) tax do you pay on a leased car?

Benefit in Kind is a tax placed on company cars to recognise the financial value of having a vehicle in addition to your salary.

We can’t give you a simple answer for how much BiK tax employees will have to pay on a business lease car, sadly. That would be too straightforward. 

BiK will depend on a few different factors, including the car’s value, its CO2 emissions, and your personal income tax rate.

You can save money on BiK by opting for a hybrid or electric car lease, like a Tesla Model Y or a Jaecoo 7.

Company car tax on electric cars is a lot cheaper than on a petrol or diesel equivalent. Meaning you could save yourself a tidy sum that could be spent on something a lot more fun. Office pool table anyone?

Currently, electric car tax is fixed at 2% until 2025, where it’ll increase by 1% each year until 2028.

Although BiK can appear daunting, company car tax can still work out cheaper than personal tax, even if you’ve opted for a petrol or diesel car.

Take the stress out of calculating Benefit in Kind with our company car tax calculator.

Is leasing good for company accounts?

In short, your company accountants will love you. You’ll be freeing up their balance sheets and business liabilities with leasing, compared to the more old-school financing methods such as the traditional PCP deal.

That’s right – no ownership, so no need to list as an asset. 

This keeps your balance sheet freed up for the more boring aspects of business, and opens more opportunities for borrowing money in the future, keeping lines of credit clear.

What about salary sacrifice schemes?

Suppose you’re an employer looking to provide a non-cash incentive to your staff members, or an employee hunting for an affordable way to score a shiny new car. Salary sacrifice schemes could be just the ticket, especially with an electric car lease.

It’s a win-win with tax savings all around. Employees save on Income Tax and National Insurance, while employers cut down on Class 1 National Insurance Contributions.

And the best part? It’s a piece of cake.

All you do is ‘sacrifice’ a slice of your gross salary to cover the net lease cost, and boom – you’re cruising in one of the latest EVs for a fraction of the price.

Sure, there’s still a bit of BiK tax to pay, but since electric cars sit in the lowest BiK brackets, the monthly cost is a drop in the bucket compared to the savings.

Take a look at our salary sacrifice calculator, and see what you could save on your next electric car lease. 

The bottom line

When it comes to business car leasing, the tax benefits really do speak for themselves.

From claiming back VAT and offsetting lease costs against your tax bill to avoiding the headache of depreciation, leasing puts you firmly in the driving seat of your company finances.

Electric vehicles offer the most significant tax advantages with 100% deductibility and the lowest BiK rates, making them the smart choice for forward-thinking businesses. And with fixed monthly payments covering everything except fuel, budgeting becomes as easy as a Sunday morning.

Whether you're a limited company looking to upgrade your fleet, or considering a salary sacrifice scheme for your employees, leasing delivers some serious financial benefits that traditional car ownership simply can't match.