Who is responsible for paying vehicle tax on leased cars?

29th Jun 2021

Who is responsible for paying vehicle tax on leased cars?

We all know that car ownership payments don’t stop as soon as you drive away from the dealer. There will always be on-going costs such as insurance, fuel, maintenance and road tax.

Car leasing, on the other hand, is a different kettle of fish. Depending on the deal you strike with your leasing provider, you can have many of these covered in your monthly lease payments.

So, what about tax? The answer lies in whether you choose business or personal leasing.

Business leasing tax rules

Vehicle excise duty, or road tax, applies to all drivers who have leased a car through the business – unless the employers agree to pay it. However, business leasing does come with some tax exemptions.

For example, Benefit in Kind tax (a kind of income tax for company incentives, e.g. company cars or healthcare) can be reduced if you choose a low emission car. Likewise, you can claim back 50% of the VAT on monthly payments for business-only vehicles. If your contract includes maintenance, you can claim back up to 100% of the VAT.

Personal leasing tax rules

Unlike business leasing, road tax is included within the cost of most standard leasing deals. Without any additional extras, you’ll walk away with a brand new car that’s taxed and doesn’t require an MOT – unless you lease it for more than three years.

However, remember that the road tax is only paid for the duration of your lease. This could land you in hot water if you pursue alternative options.

Personal contract purchase

This is something of a halfway house between leasing and purchasing a car outright. With a personal contract purchase agreement, you agree to buy the car once your leasing term has come to an end.

At the end of your lease, you’ll pay what’s known as a balloon payment. This is one large payment that covers the value of the car relative to what it’s worth after depreciation. You can reduce this by paying more upfront with your initial down payment.

However, it’s important to remember that the privileges of a leasing contract no longer apply. The car is now yours, and as such, you’ll be responsible for paying your own road tax.

Likewise, if the car is more than three years old, you’ll also have to arrange your own MOTs and general maintenance. Any insurance or maintenance deals you have with your lease provider will cease after the contract ends.

How much will I have to pay?

To calculate the Benefit in Kind tax on a business lease, you can use this HMRC calculator. Bear in mind that cars with higher emissions will be costlier.

To find out how much you could pay on a personal contract purchase, this vehicle tax rate calculator from HMRC will break down cars by engine size, fuel type and CO2 emissions.

If you’re not sure, ask to speak to one of our leasing consultants today. We’ll help you find the most cost-effective deal to suit your needs.