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Business car leasing – the ultimate guide for the self-employed

6-minute read

Woman on the phone outside company car
Catriona Smith

Catriona Smith

30 May 2023

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Business car leasing, or business contract hire, is when you lease a car through your company instead of buying a new one. Sole traders, freelancers, and small businesses alike may choose to do this for a number of reasons – and may even see tax benefits for doing so.

Latest figures from industry body British Vehicle Rental and Leasing Association (BVRLA) show growth in both car and van leases for businesses – particularly for plug-in vehicles. But there are things to bear in mind when weighing up if business car leasing is right for you, which we’ll explain more in this article.

Here’s what we’ll cover (jump to section or keep reading):

What is business contract hire?

Business contract hire is when you pay for a car for a specific period of time but will never own it. The agreement usually has a mileage cap and there are costly penalties for going over this.

Most leases are two to three years with monthly payments. When the lease comes to an end, you’ll give the car back and have the option of taking out a new lease with the latest model.

In our guide to buying or leasing a van we covered some of the benefits of leasing, and much of this is the same for business cars. Here’s a reminder of some of the key points:

  • reduce your tax bill – if you’re VAT registered you can claim back 100 per cent of the VAT on the monthly payments if the vehicle's used solely for the business. Self Assessment taxpayers can deduct allowable expenses from turnover to reduce their tax bill
  • no large upfront cost to get driving – just pay monthly (after an initial deposit) and you’ll be out on the road
  • avoid service and maintenance costs – these are often covered by your leasing company

You’ll usually have all road tax included in your lease too, with the option of also including breakdown cover and insurance.

Choose the type of business car leasing you need

There are different types of leasing available depending on whether you want to eventually buy the vehicle or not.

We’ve already mentioned business contract hire (where you’ll never own the vehicle), but it’s also worth knowing about these options:

  • business contract purchase – buy a vehicle in monthly instalments (plus interest), with a final large ‘balloon payment’ at the end of the contract. This usually includes maintenance and other services in the agreement
  • finance lease – a more flexible way to rent a vehicle in instalments (plus interest) over an agreed time period, then the car will be sold to a third party at the end of the lease (or you may have the option to buy)
  • business lease purchase – this is a finance plan which gives you the option to buy the vehicle after a long-term lease (plus interest), but it doesn't include maintenance costs

Interest rates and tax increases have meant car finance leasing has become more expensive recently. The Association of Fleet Professionals (AFP) reported new company car and van leasing rates increased 1.5 per cent on average in November last year.

You don’t pay interest on business contract hire though, making it a more attractive option compared to buying a car on finance when interest rates are high.

What about leasing a company car as a sole trader?

A business car can be a useful asset for many self-employed and freelance professionals. For example, as a fitness instructor you’ll be travelling between clients and might need to carry equipment too. Or perhaps you’re a mobile hairdresser needing a vehicle to get from A to B?

Buying a new car is costly if you go down the route of paying cash upfront. While it’s possible to also buy a new car on finance, you might consider a business contract lease for your business for some of the reasons we’ve mentioned above.

Sole traders can qualify for a business car lease. This type of agreement is also suitable for VAT-registered companies, partnerships, and limited companies.

How does business car leasing work?

There are a few steps to leasing your business car:

  1. Provide company documents – share proof of your identity and company details like address, bank statements, and annual net income
  2. Business credit check – leasing companies will do a credit check on your business before you can take out an agreement
  3. Pay a deposit – you’ll usually pay a deposit to lease your car and this can be anything from just one month to several months upfront. Some companies offer a ‘no deposit’ option but this can mean higher monthly payments
  4. Decide whether to include insurance in your lease – this can save time and hassle with everything rolled into your monthly costs. Read more about business van insurance.

How does company car tax work – for you and any employees?

If you offer a company car for people who work for you (this can be a nice perk for employees) then you’ll need to understand the tax implications.

A company car for staff is a taxable benefit, known as a ‘benefit in kind’. This means your employee will need to pay tax on this if they use the company car for private use – this includes driving to work.

Consider too that company directors count as ‘employees’ in this instance.

Not only this, as an employer, you’ll need to report the company car benefit to HMRC every year using a P11D form. You may have to pay National Insurance on this.

How much is company car tax?

You can use HMRC’s company car tax calculator to work out how much you (or your employees) might pay in benefit in kind if you’re a company director.

Is leasing a car tax deductible?

If you pay tax through the Self Assessment process then you’ll be able to claim back certain expenses. A company car counts as a tax-deductible expense, but you mustn’t include 15 per cent of your costs if the vehicle’s CO2 emissions are more than 50g/km. This could make leasing a hybrid or electric vehicle a more attractive option.

You should also note that sole traders can use a flat rate to pay tax on mileage as part of HMRC’s simplified expenses process.

Company car vs company car allowance

Offering your staff a company car allowance in their paycheque is an alternative to managing a fleet of company cars. This lets them choose and maintain their vehicle but they get a cash benefit in their salary for using it for work.

Your employees can then use the money to buy or lease a car themselves, which is then theirs to use for both business and personal use.

How much company car allowance you pay your staff will depend on how many miles you expect them to drive for work, average car maintenance costs, and their job role.

As an employer, you’ll need to pay National Insurance contributions on the car allowance. Your employee will pay tax on the company benefit as a benefit in kind (as with using a company car for personal use).

Other things to think about

Branding. You can usually use vehicle wrapping as a way to advertise on your company car (although check the terms of your lease first). This gives you the chance to change the way the vehicle looks, for example adding a logo, but can be easily removed when your lease is up.

Read up on marketing and advertising for more ideas to boost your business.

Hybrid and electric vehicles. Vehicles with lower or zero emissions can reduce the benefit in kind tax on company cars, as it’s based on CO2 emissions.

Can you keep up with monthly payments? You’ll need to be confident that your cash flow is healthy and you can commit to paying for the car lease every month. Not doing so can impact your credit score and result in your car being repossessed.

A sinking fund can help you manage unexpected costs, according to financial expert Charlotte Jessop. Or download our budget template for small businesses to track your finances.

Final thoughts

Ultimately, whether you decide to go down the business car leasing route or opt to buy a car upfront is going to depend on your business’s circumstances. Leasing may give you the peace of mind that you know the monthly costs and don’t have to worry about maintenance and depreciation. That said, it’s important to make sure you’re not entering into an agreement with a leasing company that you can’t afford down the line.

Have you considered business car leasing? Let us know any questions in the comments below, and we’ll do our best to answer.

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Catriona Smith

Written by

Catriona Smith

Catriona Smith is a content and marketing professional with 12 years’ experience across the financial services, higher education, and insurance sectors. She’s also a trained NCTJ Gold Standard journalist. As a Senior Copywriter at Simply Business, Catriona has in-depth knowledge of small business concerns and specialises in tax, marketing, and business operations. Catriona lives in the seaside city of Brighton where she’s also a freelance yoga teacher.

We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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