Content sponsored by Purple Lime
You’re in the market for a new car. It is an exciting time, and you spend days pouring over brochures, looking up reviews and booking test drives before settling on the perfect car for you. But that isn’t the end of the journey. As a business owner, you have a big choice to make. Do you finance this car personally, or do you lease it through your limited company? The short answer is it depends. There are a lot of different factors you will need to consider before you put pen to paper.
Personal finance for buying cars is incredibly common – in fact around 90% of new cars are bought on either a Personal Contract Purchase (PCP) or Hire Purchase (HP) agreement. This means there are a lot of different options available for you, and you can shop around to find the right one before you commit. It also means that if you want to, you can return your car every 3 years and change it for a new one, depending on your lease agreement.
If you go for a personal lease agreement, the car is yours. It has nothing to do with your business, and you do not have to pay any extra taxes on it, like company car tax or benefit in kind (more on these later). It also means that if the company shuts down, you choose to leave or you sell the company, the car stays with you. And any mileage you do in the car for business purposes can be claimed back from your business, so you will not be out of pocket for travelling. It is the ideal solution if you want to keep your work and personal life completely separate.
However, that is all you can claim. You are personally responsible for insuring, servicing and repairing the vehicle, and cannot claim any of these costs from your business. You will also be required to pay the VAT on your car in full and cannot claim it back even if your business is VAT registered. It is also not a business expense, so you cannot use it to cut down your tax bills either.
Leasing through your company
There is a strong case for any leased car a company director drives to be leased through the company, and the main benefit is that it keeps the agreement separate from your personal finances. Since the lease agreement is in the company name and not yours, you have no personal liability to pay the remaining balance if the business was to fold.
Another benefit is cost. Since any lease payments you make under an operating lease are fully tax-deductible, so can be offset against your corporation tax. It’s also much simpler to lease a car for a business, and your business takes care of admin, payments etc, while you enjoy driving your new car. If you need a pool of cars, you can also benefit from group discounts not available to the wider public. You are also able to claim back the VAT on the lease payments – 50% if you also use the car for personal use, or 100% if you are a driving instructor or taxi driver – as well as repairs and maintenance costs.
Leasing a car through the business also means you are reliant on business finances to fund those payments. So, if you think your company could have some issues with cashflow coming up, or you are a relatively new company, then this might not be the best option.
The biggest disadvantage is the benefit in kind tax. If you are an employee (including directors) that uses a company car for private use, you are required to pay benefit in kind tax to HMRC for the benefit you are receiving through the car. The rates for this will depend on the CO2 emission of the car, the P11D value of the vehicle and your own personal income tax bracket. So, the higher your CO2 emissions, the more company car tax you pay. The standard rate is currently at 24%, but you can reduce this to just 2% by opting for a hybrid car, or 1% by choosing an electric car.
Ultimately, whether to lease a car personally or through your business is something that requires careful thought and a thorough examination of the figures. If you choose the wrong option, you could end up paying a lot more for that car than you needed to! We recommend working with an accountant to understand the pros and cons of each lease type and come to a decision that will be best for you and your business. At Purple Lime, this is exactly what we do. Because we get to know your business in-depth, we can help you evaluate your options to make the best financial decision, with no nasty surprises down the line. If you would like to know more, please get in touch by emailing firstname.lastname@example.org or calling us on 01249 691360.
To find out more about Purple Lime visit: www.purplelime.uk.com