Business versus personal leasing: What should you consider for your company

lease car

With more employees looking to avoid public transport during the pandemic, businesses and consumers are considering other options to get about – including vehicle leasing.

Vehicle leasing can be a cost-effective and hassle-free way to drive a brand-new car or van, removing concerns about the depreciation of the vehicle and the need to pay for the whole cost of the car.

But is it more tax efficient to lease a car personally or through your limited company? John Wilmot, CEO and founder of LeaseLoco explains that though there is no definitive right or wrong route, there are some key benefits and restrictions to consider before you make your decision to ensure you end up nabbing the best deal.

Be aware of BIK

With a business lease, companies can finance their vehicles with a minimum down payment in what is more often than not a cheaper alternative to buying the car on a PCP loan. With both business and personal leases alike, you will need to consider factors such as the agreement term, mileage required and budget, but taxes also play a key factor in businesses leases particularly.

One of the main things to consider is three ugly letters you’re probably already familiar with: BIK (benefit in kind). It refers to any perk or fringe benefits included in an employee’s package and used in both personal and work time – in this case, a company car. It is likely to be the biggest influencer in your decision to take a business lease over a personal lease.

BIK can be based on a number of variables, such as the car’s value, the driver’s personal tax bracket, and the car’s CO2 emissions. Many companies will therefore look to keep BIK tax as low as possible for car drivers. In some instances, you can reduce the amount of tax you pay by using the vehicle part-time and contributing towards the cost of the car.

With business contract hire agreements, many companies will be able to claim back half of the VAT paid on monthly vehicle rental costs. For example, if your car costs £200 per month plus VAT, you can save £20 per month if you’re paying it via a business contract hire agreement; this could be a significant factor when the monthly cost starts to increase. For vans and pickups, the news gets even better with 100% being recoverable.

The vehicle type dilemma

Vehicle type is also important to consider when looking at a lease, since the BIK on a van or pickup is calculated differently to a car. For vans, the tax is calculated by a fixed rate, with its CO2 emissions and value not taken into account. At present, the fixed rate is £3,490 and users will need to pay 20 to 40% of this rate, depending on your personal tax bracket. Opting for a van or pickup could therefore be a good option for you if it would suit your range and business needs, and result in you paying less tax.

Alternatively, an electric or hybrid vehicle could be best for you. In June 2019, the UK became the first major economy to write into law a net zero carbon target, with 2050 being the deadline. This level of change requires action now, so it’s of no surprise that cars do have an impact on your BIK based on their CO2 output, and that will ultimately focus your business lease search around electric and hybrid vehicles that fall within an economically acceptable level. The result is that all petrol and diesel, non-hybrid cars are going to be cheaper as a personal lease, paid for out of net income.

To see this benefit in practice, let’s consider an EV available to lease on the UK’s biggest car lease comparison site, LeaseLoco. The Hyundai Kona 100kw Premium 39kWh costs £34,750 to purchase outright. At the time of writing, the car is available to lease for £234.93 + VAT per month for three years. Businesses can therefore claim back half the VAT, making the cost to the business just £258.42 per month.

We asked Amar from Empire Van Hire Birmingham, who has leased & owned many vans & vehicles since the company was founded in 2014. He said “Leasing a van can be one of the best investments you make for your business & can open up new opportunities without damaging your cash flow.

What about your pay packet?

There are also employers’ National Insurance Contributions (NIC) to pay, but if you take a car allowance as salary that also applies, so it makes no difference in cost to the business. If you are an English higher rate taxpayer, taking £258.42 as salary per month leaves you with £149.89 after PAYE and NIC of 42%. Consequently, the true cost to the motorist comes out in this example as less than £150 per month for a near £35,000 list price car: a no brainer if the EV range is suitable for your needs. There is also no road tax to pay, often little to no service costs on an EV, and the car will also be warrantied throughout. Even for a standard rate taxpayer, this effectively results in saving 32% tax, creating an effective monthly cost of £175.73.

For the 2020-2021 tax year, fully electric vehicles have zero percent BIK to support the government’s plans for a greener and more sustainable economy. For the 2021-2022 financial year, the rate for zero-emissions cars will rise to one percent, then to two percent the following year. Even with these eventual rises, the savings impact is still huge, and the driver can gain a higher-end, sustainable vehicle for a relatively low price. In the above example, a one percent rise in BIK would result in just an extra £11.58 per month in the second year, and only £23.16 per month in the third year. Evidently, while the BIK is so low on EVs, the impact is significant. For the above car example, the motorist would have to earn £486.07 of gross earnings per month to pay for the car on a personal lease.

Overall, you need to assess what you’ll use the vehicle for, the range required, and how that may impact your taxes. if you need a vehicle that has high CO2 emissions or a high value, leasing privately might be the more cost-effective option. However, if you can opt for an electric vehicle, then a business lease may be your best option. Ultimately, you must weigh up the benefits and the suitability of the vehicle to you and to the business.