Taxes. Everybody hates them, and they always find a way to sneak up on you.
Except when it comes to business car leasing. Here things become a bit more generous, especially compared to personal car leasing.
Due to the fixed low monthly costs, the simple process and the positive tax implications (which have the main benefit of making your lease payments tax deductible), business car leasing deals can help cut costs for your business.
So, what are the tax benefits of business car leasing?
Company Accounts: Improves Your Balance Sheet
You don't own a lease car, which, guess what . . . means that any car lease payments will appear ‘off balance sheet’ and won’t appear as either an asset or liability on your business balance sheets. That can be a great draw to make your company accounts look stronger to investors when looking for credit.
Claim Back VAT On Your Car Lease Payments
The best perk is that your payments are VAT-recoverable.
If you use the car for business use only, you will be able to reclaim 100% of the VAT on your monthly lease payments, significantly saving costs. Or if you use the car for both business and personal use, you'll be able to claim 50% of the VAT back, which is still a lot better than personal car leasing – where you get to claim a grand total of 0%.
Of course, your business will need to be VAT-registered in order to qualify for these benefits.
Claim Back Mileage Costs and Maintenance Packages
More of a bonus here, as any excess mileage charges (that's when you go over your contractual yearly mileage) and maintenance costs are also VAT-recoverable. Which is also why it can sometimes actually be cheaper to pay for the excess mileage charges at the end of your lease than to opt for a higher mileage at the start of your business leasing agreement.
Can I Do Business Leasing as a Limited Company?
Yes, you will be able to lease a car through a limited company with business leasing. This option is available for many kinds of businesses, including partnerships, charities and sole traders.
To be eligible, you must:
- Be currently trading
- Have a suitable profit level and/or income
- Pass a credit check
Reclaim Costs Through Corporation Tax
If you're a limited company with a business car lease, you can reclaim up to 100% of your business car lease payments through your corporation tax. As mentioned before, this also includes additional costs which are part of the lease agreement, for example maintenance packages.
The tax treatment depends on the CO2 classification of the vehicle:
Vehicles with CO2 emissions under 50g/km: The full amount of your lease payments can usually be deducted as a business expense
Vehicles with CO2 emissions greater than 50g/km: Only 85% of your leasing costs will be tax-deductible
Vans are an exception though, because businesses can claim 100% of the costs regardless of emissions.
Do I Have to Pay Company Car Tax if I'm Self-Employed?
No, you won't have to pay company car tax. In legal terms, there's technically no difference between you and your business.
Just a reminder, you're self-employed if you:
- Own a business and work for yourself
- Work for multiple clients
- Provide tools and equipment to finish a job
- Agree on fixed prices for your work
Find out more about self-employed business leasing.
How Much Benefit-in-Kind Tax Do You Pay On a Leased Car?
The benefit-in-kind rate will be calculated using a number of factors:
- The CO2 emissions of your vehicle
- Your earnings
- The P11D value (market price) of your vehicle
On that basis, the benefit-in-kind rate can be worked out in a calculation whereby you multiply the P11D value by the CO2 emissions band percentage of the car, and then multiply this by your personal income tax band percentage.
But you should be able to find out much quicker by simply heading over to the HMRC tax calculator, than if you calculate it yourself.
The benefit-in-kind rate for electric and hybrid cars was previously fixed at 2%, but will increase by 1% in the 2025-26, 2026-27 and 2027-28 tax years. This will bring rates to a maximum of 5% for electric cars and 17% for hybrids.
Basically, you can save money on benefit-in-kind tax by opting for a business lease on hybrid or electric vehicles.
What Is Benefit-In-Kind (BIK)?
Benefit-in-kind (BIK) tax is a tax charged on employees or directors who use a company car for personal purposes, including during business car leasing arrangements. It’s essentially a tax on the value of the private use of a company vehicle.
A company car is a great incentive where your employer provides you with a vehicle to use as a benefit on top of your annual salary, usually to be used for both business and private use. As this is on top of your annual salary, the government places a tax on company cars, known as Benefit in Kind (BIK) tax, that you will need to pay. If the company car scheme includes fuel then you will also need to pay tax on this fuel allowance.
Business Car Leasing With LeaseLoco
Ready to take advantage of business car leasing and its generous tax benefits? Then take a look at our business car leasing deals and start your car leasing journey.
Not after a business lease car? Head over to our van lease deals (which are also classed as business deals), and as the UK’s biggest car lease comparison site, we are confident we'll be able to find you the perfect deal.
FAQs about Business Car Leasing Tax Benefits
Is business car lease tax deductible?
A business car lease is tax-deductible, and you'll reap the main VAT and tax benefits as long as your company or business is VAT-registered. Specifically, you'll be able to reclaim 100% of the VAT on your monthly payments if you use the car for business purposes only, or 50% of the VAT if you use the car for both business and personal use.
Is it better to lease or buy a car self-employed?
Leasing requires access to less upfront cash, and includes perks like road, tax, breakdown cover and the full manufacturer's warranty. Plus, you won't have the hassle of having to sell the vehicle on in the future. In general, business car leasing can be a tax deductible expense, making your life easier.