Are car lease payments tax deductible?

17th Mar 2021

Are car lease payments tax deductible?

One of the many benefits of leasing a car is the tax reductions that come with it. Depending on whether you’re leasing for personal or business use, there are certain taxes that you will either be exempt from, or can claim back through HMRC.

So, how can car leasing offer tax relief for businesses and individuals?

Personal contract hire

Personal car leasing (PCH) is for those who need a car for personal use, for example day to day travel, leisure and commuting to the workplace.

When you sign up to a personal leasing package, you’ll benefit from not having to pay road tax. This is included in your leasing contract, which can save a significant sum, particularly if the car you choose has high CO2 emissions.

Business contract hire

Business leasing (BCH) is exclusively for business use. It’s important to remember that company cars used for the work commute will need a personal leasing contract instead, as this is classed as personal travel.

Company cars offer a great fringe benefit for employees and can offer tax benefits on VAT. If your fleet is exclusively for business use, you may be entitled to claim back up to 100% of the VAT on monthly payments.

If your contract includes a maintenance agreement, you can also claim back 100% of the VAT on this. Cars that are used for both personal and business travel can still claim VAT on mileage – all you need to do is deduct any personal mileage from the final total.

What about Benefit in Kind tax?

Those who take out a personal lease are also exempt from Benefit in Kind (BIK) tax. This is applicable to business leases only, and is an income tax which is payable by the driver.

There’s no fixed fee for BIK, but there are ways of reducing it or paying nothing at all. BIK is calculated based on the value of the car, your annual income, and how much time the car spends off-road, for example if it’s in the garage.

How to reduce Benefit in Kind tax

The value of your company car – the P11D value – is calculated by a number of factors including the car’s emissions. If your fleet includes electric vehicles, your staff will not have to pay any Benefit in Kind tax.

This new law was introduced in 2019 and applies to electric or very low emission vehicles. Cars with zero tailpipe emissions will be exempt from BIK tax – originally, this was exclusively for cars registered after April 2020, but the government has now extended this to cars registered before this date.

Low emission cars, which do not have to be strictly electric, will also benefit from the zero-rate. They must have emissions of 1-50g/km and a pure electric mile range of 130 miles or more. Be mindful, however, of the forthcoming changes:

For cars registered after April 2020

BIK rates will increase to 1% in 2021/22 and 2% in 2022/23.

For cars registered before April 2020

BIK rates will increase to 2% in 2021/22 and for the next two years.

This is subject to change, however, as the government says: “We hope to announce appropriate percentages at least two years ahead of implementation to provide certainty for employers, employees and fleet operators.”

Get in touch with us if you have any more questions relating to tax.