Are you self-employed? Maybe you’re part of a limited company and you’re wondering if you’d be better off financially if you leased a car through the business. This article intends to help you figure out which option is best for you based on your circumstances. Read on for more information...
If you wish to qualify for business leasing and you’re self-employed, you will have to go through a very similar process to leasing privately. This includes a credit check, and you will also need to provide your latest set of (business) accounts. Your most recent bank statements may be required as well as ID and proof of address - all standard stuff that you would expect.
Choosing which method of leasing, personal or business, can prove very costly for directors if they make the wrong call. This is in part due to the fact that a lot of money can be saved through business leasing - if you are VAT registered, you can claim back 50% of your monthly payments on the vehicle and 100% of the VAT on the maintenance agreement. So, you can offset all or some of the rental against your tax return. This means that there is a significant potential to save money compared to private hire.
When it comes to leasing a car through your business you have a few options and they are as follows: Business Contract Hire, Business Contract Purchase, Finance Lease, Operating Lease. Each has different benefits depending on your needs. If you choose to have a business contract hire car - then the asset can be “off balance sheet” which is a huge plus as the liability of the finance is not shown on company accounts. If, on the other hand, you were to go down the path of a finance lease, then you can offset 50% of the VAT on a car and 100% of the VAT on a van, making this option extremely tempting.
Furthermore, leasing companies tend to provide business users with better deals. Of course, you’ll have to pay company car tax, unless you’re a sole trader.
Note that, however, if you use your car for personal use then you will have to pay company car tax - this is unavoidable. You will need to calculate the proportion of time that you spend using the vehicle privately and keep a log of this information - showing what proportion was personal and what was business use. Moreover, there is no VAT tax benefit at all if you use the car privately. You don’t have to pay company car tax if the vehicle is left on your business premises overnight and at weekends - if possible. Obviously, with most users this isn’t going to be the case, but it’s something to bear in mind depending on your circumstances. Company car tax is also always going to be considerably cheaper than if you were to lease a car personally. Maintenance and road tax are included in your lease agreement, just like personal hire - and most rental periods are from one to five years.
Company car tax is calculated on the amount of CO2 that your car emits, your personal tax bracket, and the P11D value of the car - meaning the list price, plus the cost of any additional options you’ve chosen as well as the delivery charges. In essence, if your car has higher emissions then you’ll be paying more. This is so as to dissuade drivers from buying diesel cars. Although this is something you’ll have to pay the lease payments are tax deductible for Corporation Tax purposes, opening up more potential for saving on a smaller scale.
If the owner of a business and you intend to use vans and pickups, then you will pay a fixed car-tax rate. This is worked out differently, as the car’s CO2 emission and P11D value are ignored. The rate is currently £3,170 - you’ll have to pay 20-40% of the rate depending on your personal tax bracket. If your business would benefit from a van or pickup, then this could be the ideal option. You’ll end up paying considerably less than if you chose a car.
If we’re to take a look at finance lease then you’ll also reap the benefit of having no mileage or condition restrictions. You’ll have a fixed fee for a set period of time. Once that time is up, however, things vary. You will have to find a new buyer and introduce them to the financial house. This sale will then pay off the remaining amount of the balloon payment. If you happen to sell it for more than the balloon payment, you get the equity - however, if you don’t, you’ll have to stump up the cash. Due to the lack of mileage and condition limitations, finance leasing may be a perfect solution if you’re a builder. This type of hire also boasts small initial rental figure and sensible balloon payments - as well as secondary rental periods of a year at a lower cost if you still need the vehicle(s).
Lastly, it’s also important to mention that you will be exempt to company car tax if you: are a partner or a partnership, a member of a limited liability partnership, or you are the proprietor of your own business. As mentioned previously, this means that if you’re a sole trader, you’re exempt. If you become a limited company, though, you’ll have to pay.
So is business leasing a sensible and cheaper option? Well, there is no right answer - it depends entirely on your situation. Personal contract deals will cost you more monthly but you won’t have to pay car tax, although if you’re VAT registered, then you can claim back the VAT. It’s essential that you’re able to provide the leasing company with all of the information that they require, including records of your latest set of accounts. It also depends on what kind of car you wish to drive; environmentally friendly cars will be much cheaper through business hire as your company tax calculation will be higher if your chosen vehicle has high emissions. Whatever you decide to do, we hope that this guide has given you some insight into the benefits of business leasing over personal hire. It isn’t for everyone, of course, but if you happen to fit certain criteria then there may be great potential to save money.
If you have any queries, don’t hesitate to get in touch with our team at Yes Lease and as always, drive safe.