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Business Car Leasing Tax Implications Explained

Leasing company vehicles using Business Contract Hire is a hassle free way to provide a fleet of new cars for your workforce. It can also be tax efficient, and offer employees a perk that is highly sought after. 

There are however still duties which need to be paid, and on this page we will explain all the tax implications of leasing cars through a business.

How does Company Car Tax work?

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). 

The amount of tax to be paid is determined by the vehicle's list price, CO2 emissions and the type of fuel it uses (electric vehicles are exempt from company car tax). The price used for the vehicle, called the P11D value, is then multiplied by the BIK rate and the motorist's own personal tax rate to find the annual amount of company car tax payable, which is usually then deducted alongside their other tax liabilities through PAYE. 

For example, if an employee receives a car worth £20,000 with a BIK rate of 15%, the benefit is seen as worth £3,000 so for a 20% tax payer an extra £600 would be payable annually.  

How is the BIK (Benefit In Kind) rate calculated?

This table shows the applicable rates for the current tax year. From April 2020 there will be a new set of rates published and from that date newly registered zero emissions vehicles will be exempt from company car tax altogether. For vans and pickups there is a standard BIK amount, currently set at £3,430, which you will pay at your effective tax band rate (usually either 20% or 40%)

CO2 (g/km); Petrol
2019/20 BIK rate
Diesel*
2019/20 BIK rate
0-50

16%

20%

 
51-75

19%

23%

 
76-94

22%

26%

 
95-99

23%

27%

 
100-104

24%

28%

 
105-109

25%

29%

 
110-114

26%

30%

 
115-119

27%

31%

 
120-124

28%

32%

 
125-129

29%

33%

 
130-134

30%

34%

 
135-139

31%

35%

 
140-144

32%

36%

 
145-149

33%

37%

 
150-154

34%

38%

 
155-159

35%

39%

 
160-164

36%

40%

 
165-169

37%

41%

 
170-174

37%

41%

 
175-179

37%

41%

 
180+

37%

41%

 

*Diesel cars which pass the RDE2 requirements will be charged the lower BIK percentage rate.

Are business car lease payments tax deductible?

If you choose to lease a car through your business you may be able to use the payments to offset against your corporation tax liability. Bear in mind though the vehicle must have CO2 emissions under 130g/km to be eligible.

How does car fuel benefit work?

Employees who receive free fuel from their company to use for personal journeys must pay tax on that fuel as it is treated as a benefit. There is a set figure used alongside the BIK rate to calculate the charge applicable. 

For the current tax year the rate is £23,400 and this must be multiplied by the vehicle's BIK rate and the employee's personal tax rate to reach the figure that they are liable to pay. For example with a BIK rate of 30% (eg for a petrol car in the 130-134g/km emissions bracket) the benefit in kind would  be £7,020 so a 20% tax payer would be liable to pay an extra £1,404 in tax each year. Of course this benefit would only be of use to the employee if they spent less on fuel than that each year. 

Also be aware that even if the free fuel is available for part of the year the full amount of tax is still payable.

How do you reclaim VAT on a car lease?

In most cases 50% of the VAT on car lease payment for a Business Contract Hire vehicle can be reclaimed, if the vehicle is to be used only for business purposes and not available for personal use this could be 100%. VAT should be reclaimed in the normal way using your 3 monthly VAT return.

View our range of business car lease deals here.

 

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