Can I lease a car through my limited company?

Nowadays, car leasing is more popular than ever before. Your monthly costs are often lower, the car’s maintenance tends to be taken care of, and you don’t have to concern yourself with your vehicle’s resale value either.

Add to that the fact you can get a brand new whip every few years, and you can see why so many people are taking advantage of vehicle leasing.

What’s more; as a contractor, business-owner, or personal service company director, you also have the option to lease a car through your PSC, so the answer to ‘Can I lease a car through my limited company’ is an emphatic ‘Yes,’ writes Lara Hodkinson, head of accounting at Danbro Accounting.

But contractors need to know the potential pluses and pitfalls of leasing a car via their LTD. Including, which car-leasing route is going to be more tax-efficient for you; leasing the vehicle through your limited company or leasing it personally?

Leasing a car personally: advantages and disadvantages

First off, we should probably make it clear what we mean by ‘leasing’. Leasing is essentially renting a vehicle over an extended period of time. Unlike buying outright, securing a loan to buy, or going through a Personal Contract Purchase (PCP), if you lease a vehicle you’ll never actually own it. A typical lease contract ranges from two-five years and often offers additional perks such as maintenance, repair work, and road tax.

It’s worth saying here that there is no ‘right’ or ‘wrong’ answer when it comes to making a decision on this. As with most financial decisions in life it’s dependent on circumstance, and there are advantages and disadvantages to both.

For instance, while you’ll be recused from paying ‘company car’ tax, there’ll be no room for reduction on your company’s corporation tax, with VAT (20%) also added to your monthly repayments.

If you lease a car personally, you’ll be required to keep a record of your business mileage. Your business then reimburses you without incurring any additional taxes.

Staying on the subject of tax; road tax or ‘vehicle excise duty’ tends to be included in your lease agreement and, perhaps the biggest benefit of all (if you’re a petrol head at least!) is that you can switch to a brand new car every couple of years.

Leasing a car through your limited company

The crucial consideration contractors need to make when deciding whether to lease a car through your limited company, is whether it’s in the best interest of your business.

For instance, if you work from home and have infrequent – or no – external appointments, you don’t need to be burdening your business with a flash car sitting in your garage gathering dust.

On the other hand, if your work involves regular visits to clients and stakeholders, or if you’re out ‘on the road’ a lot attempting to secure more business, you’ll know how important a good first impression can be. And with a vehicle, showing up in a modern, reliable car won’t hurt your personal – or professional – image.

Top 5 financial considerations with vehicle leasing via a personal services company

There are plenty of practical, and financial, considerations to take into account as a limited company car leaser. Here are the top five:

1. Tax deductible

One of the chief attractions of vehicle leasing through your limited company is that your payments are tax-deductible. This can be a major benefit for your business, especially when looking to minimise your taxable profits. Furthermore, if you use a van, for instance, you’ll still only pay a fixed, ‘car-tax’ rate.

2. VAT reclaims

The ability to claim back VAT is another financial incentive to leasing through your limited company. Generally speaking, you can recoup 50% of the VAT on lease payments if your business is VAT-registered. In practical terms, if your car costs £300 + VAT per month, you’d save £60 per month by paying for it via your limited company.

And, if you drive professionally, like driving instructors or taxi drivers, and there’s no private use of the car, you may be eligible to reclaim the full 100% VAT. That does tend to be the exception, not the rule though, as personal use is often hard to exclude entirely.

3. Benefit in Kind

If you do use your leased vehicle for personal errands, it will introduce a ‘benefit in kind’. This means the individual using the car will need to pay tax based on influencing factors like the type of vehicle, its value, and its CO2 emissions.

So what’s the silver lining? Well, by choosing a vehicle with low emissions, you’ll be paying lower levels of tax. It’s one of the main reasons electric vehicles are gaining traction among contractors and business-owners. It’s a win-win for both the environment and your pocket!

4. Cashflow management

Start-up businesses (or those wary of large capital expenditures) can find solace in leasing. Instead of shelling out a lump sum to purchase a car in the early days of a new venture, the monthly payments associated with leasing can provide some breathing space, financially.

5. Saving money

The consensus among motorists is that dealerships tend to offer better lease options for business use. And it’s a perception that’s not misplaced. Add to that the fact that your maintenance is taken care of and that monthly costs are proportionately lower than loan repayments for those who’ve borrowed to buy.

Know-before-you-lease...

Ultimately, leasing a car via a limited company isn't devoid of considerations and it’s important to make yourself familiar with the ‘terms and conditions’ of any agreement before you enter into it.

Aside to the small print, one big caveat to the plus points we’ve outlined, above, is mileage. It can be a double-edged sword. Drive more; and you might find the leasing costs start to spiral if you exceed your agreed mileage limit. And, as a contractor, if your role demands extensive travel, this isn’t something you can afford to overlook.

Limited company car leasing: in a nutshell

So, can you lease a car via your limited company? Absolutely yes, you can.

Essentially, leasing a car as a limited company director is a viable option which offers, in some cases, significant functional and financial advantages.

Remember though, like every financial decision, it's important to talk through the pros and cons and so, to that end, we recommend consulting with a professional accountant, to ensure your vehicle leasing decision aligns with your personal, professional, and business needs. One better, if you’re a PSC director eyeing a car lease? Consult with a professional accountant like us who specialises in the contractor sector.