Choosing to lease or purchase a new car is mostly a matter of personal preference. For some drivers, leasing from Leaseloco or buying from a car dealership is merely a financial decision, and for others, it's more about developing an emotional attachment to the car.
What are the tax benefits of leasing and buying a vehicle? Before deciding which path to choose, learning the differences is essential.
Personal Leasing VS Buying
Let's look at the tax benefits of leasing a car compared to buying a car for your personal use.
A standard personal contract hire (PCH) quote will already contain road tax and VAT added to your monthly payments if you proceed with the transaction. While personal car leasing does not automatically qualify you to tax deductions on the hiring cost, you can claim reimbursement for expenditures incurred while using the vehicle for business reasons.
This does not cover commutes to and from work but rather trips required to do your job. There is a possibility that you will be able to claim a deduction from your income in this scenario, which decreases your taxable income and, therefore, the amount of tax you must pay.
Buying A Personal Car
Generally, there is no tax benefit associated with purchasing a car for personal use. However, your employer should compensate you for your expenditures if your job requires you to drive for work purposes, such as visiting clients or job sites.
HMRC has established a defined rate for compensation when an employee uses their own car for non-taxable work. A 45p per mile tax credit is awarded for the first 10,000 business miles travelled in a particular tax year, and a 25p per mile tax credit is issued for the rest.
The business can then claim corporate tax relief by deducting your reimbursement expenses from its earnings.
If your company pays you more than the HMRC-approved mileage limit, the excess will be taxed and subject to National Insurance (NI) since it would be considered an income.
Business Leasing VS Buying A Company Car
When leasing a company vehicle, it is always the lender's property - they are the lease car's registered keeper. That is why road tax is included in the leasing price since they are the "taxpayer" in this circumstance, but they pass the expense along with depreciation to you.
With a vehicle lease, you can deduct monthly payments as a business cost, allowing you to recover a percentage of VAT based on your personal/business use ratio. This may be the difference between a limited business lease and a personal lease.
You must fall into one of the following groups to be eligible for the tax deductions:
- Sole Proprietorship/Self-Employed
- Businesses that are VAT registered
- Limited Liability Partnership (LLP)
- Limited Liability Company
Limited Company: Buying A Pool Car
You may claim VAT and capital allowances when you purchase a pool car entirely for your limited business. Capital allowances provide tax savings on assets purchased for company purposes, and it enables you to compute the tax due on your firm after deducting asset expenses.
While automobiles are not eligible for a yearly investment allowance (a capital allowance that allows for the deduction of the entire cost), they may be claimed via a write-down allowance.
This implies that a portion of the car's worth might be removed each year. The quantity is determined by the amount of CO2 emitted.
Limited Company: Buying A Company Car
When a limited business purchases a vehicle entirely and intends to use it for personal purposes outside of work, the tax benefit is decreased.
Where a corporate car is used for personal purposes, you will not be able to claim VAT on the car's purchase price. Still, you will be able to claim VAT on business-related operating expenses like car insurance.
What is critical to realise when purchasing a car for personal use via a limited corporation is that it produces a benefit-in-kind (BIK). Additionally, BIK is often referred to as a 'business benefit.' You will be taxed at your individual income tax rate as a benefit recipient.
The Bottom Line
When comparing the cost of purchasing a car versus leasing one, leasing might be much more profitable for corporate usage than for personal use.
By taking on a business leasing arrangement, you can save a significant percentage of VAT on your monthly payments while also benefiting from a slew of extra tax advantages.
By leasing a car, you also have access to cash flow that would not have been attainable if you had purchased the vehicle entirely.
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