Are car lease payments tax deductible?
On the whole, yes. Whether you are a self-employed businessman or a larger corporation, your yearly tax bill with HMRC can be greatly reduced by offsetting your company cars.
If you lease a vehicle through a business lease, your quote will be inclusive of VAT. Business leasing allows you to claim back up to 50% of tax on the lease fee and up to 100% on a maintenance package, depending on factors such as the vehicle’s CO2 emissions.
To do this, you’ll need to qualify for a business lease before being able to take out a deal.
In order to qualify for business leasing you must use the car for primarily business purposes and work for a VAT-registered organisation.
What is company car tax?
Because a company car is seen as an asset to an employee, it's taxed along with their income as a Benefit In Kind (BIK). Essentially the value of the vehicle is added to the employee's salary and then tax is calculated from this total.
The percentage of company car tax you pay will depend on a number of things, including:
- How much CO2 the car emits (the less polluting a vehicle is, the less BIK tax you will usually pay)
- How often the car is used
- What fuel type the vehicle uses
- List price
- Make and model
Do I always need to pay company car tax?
You don't need to pay company car tax if:
- You are a business owner, member of a partnership, or member of a Limited Liability Partnership (LLP)
- Your lease is a personal car lease
- You're offered the choice between a company car or a car allowance, and the value of the cash allowance is higher than the BIK tax
You need to pay company car tax if:
- You are using a company car or a salary sacrifice car lease scheme, and you're not one of the groups outlined above.
Who is eligible for car lease tax deductions?
To be eligible for the tax deductions, you should fall into one of the following categories:
- Sole Trader/Self-Employed
- Partnership
- VAT Registered Business
- LLP (Limited Liability Partnership)
- Limited Company
With a van lease, 100% of tax is deductible and you are able to claim it all back, as long as you meet the above criteria.
With a car, the standard rate of tax deduction is 50% of the business contract hire value. This is because the government assumes that you are going to be using the car for personal use half of the time, so it only allows you to claim for the business half.
If you can prove you never use the vehicle for personal use, then you can claim the full 100%. However, the HMRC are extremely hot on this so carefully consider if this is the right option for you. In order to make tax deductions on a leased car you need to submit a final VAT return form to HMRC. Read how to submit a final VAT return here.
Leasing an electric vehicle for work
If you choose a fully electric or very efficient hybrid car, you’ll not only be helping the environment, you’ll only pay 2% company car tax in the 2022/23 tax year. Road tax for zero-emissions cars is free too. In addition to this tax relief, you also benefit from reduced running costs.
Click here to discover our best electric car leasing deals.
Why choose Planet Leasing for car leasing in Essex
Whether it's a short-term or long-term business lease, Planet Leasing will find the best van lease deals for you. With our extensive knowledge of contract hire services, including insurance, credit providers, VAT implications, and TAX benefit advantages of car leasing, you can trust our impartial and direct advice.
PLUS enjoy Free UK delivery on all leases.
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The contents of this article are for the purpose of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
