Leasing disallowances and capital allowances for company cars for Limited companies

This is for limited companies who want to look at acquiring a company vehicle either through purchasing or business contract hire (leasing)

The tax treatment of both options is different when it comes to acquiring a company car.

Leasing allowances and capital allowances for company cars for Limited companies

Leasing vs Buying: The Basics

• Leasing: When leasing a car, your company pays a monthly fee to use the vehicle over an agreed period. Ownership remains with the leasing company, and your business avoids the upfront capital outlay.

• Buying: Purchasing a car outright (or through a loan/finance agreement) makes your business the owner of the vehicle. This comes with higher upfront costs but allows you to claim depreciation through capital allowances.

Each approach has its tax implications, which we’ll delve into below.

Leasing: Tax Treatment and Disallowances

When your company leases a car, you can deduct the leasing costs from your taxable profits. However, there are restrictions based on the car’s CO2 emissions:

• Cars with CO2 emissions of 50g/km or less: 100% of the net lease payments are tax-deductible.

• Cars with CO2 emissions above 50g/km: 15% of the net leasing costs are disallowed. This means you can only claim 85% of the net lease payments against taxable profits.

Example

If your company leases a car with CO2 emissions of 70g/km for £10,000 annually, the deductible amount would be:

• Deductible amount = 85% of £10,000 = £8,500

The remaining £1,500 is non-deductible and added back to your taxable profits.

If your company leases an electric car or a Plug In hybrid (PHEV) car with CO2 emissions of between 0-50g/km for £10,000 + VAT annually, the deductible amount would be:

• Deductible amount = 100% of £10,000 = £10,000

ie all the £10,000 is deductible from your taxable profits.

Buying: Capital Allowances

When purchasing a car, your company claims tax relief through capital allowances. The rate of relief depends on the car’s CO2 emissions:

• Cars with CO2 emissions of 0g/km ie full electric:

  • Eligible for 100% First-Year Allowance (FYA), meaning the full cost can be deducted in the year of purchase.

• Cars with CO2 emissions between 1-50g/km:

  • Qualify for the Main Pool Writing Down Allowance (WDA) at 18% per year.

• Cars with CO2 emissions above 50 +g/km:

  • Allocated to the Special Rate Pool, where relief is given at 6% per year.

Example

If your company buys a new car for £25,000:

1. If the car has CO2 emissions of 0g/km (eligible for FYA):

   • Full £25,000 is deductible in the first year.

2. Or if the car has CO2 emissions of 40g/km (Main Pool WDA at 18%):

   • Year 1: £25,000 × 18% = £4,500 deductible

   • Remaining balance carried forward: £25,000 - £4,500 = £20,500

3. Or if the car has CO2 emissions of 120g/km (Special Rate Pool WDA at 6%):

   • Year 1: £25,000 × 6% = £1,500 deductible

   • Remaining balance carried forward: £25,000 - £1,500 = £23,500

Other Considerations

VAT Recovery

• Leasing: If the car is used for business and personal purposes (ie a 'company car'), 50% of the VAT on the lease payments can typically be reclaimed (100% for maintenance costs). If it is used solely as a Pool vehicle, you can reclaim 100% of the VAT.

• Buying: VAT recovery is only possible if the car is exclusively used for business purposes, which is rare for company cars.

Benefit-in-Kind (BIK) Tax

Whether you lease or buy, providing a car for employees to use privately incurs BIK tax. The rate depends on the car’s CO2 emissions and its list price. Lower-emission cars are more tax-efficient.

Don't mix up the percentages of leasing with the percentages of buying!!!

Get in touch and speak to Paul, who looks after a lot of limited company queries on company cars and can provide the answers to your queries on 028 9693 6363 - email sales@everyvehiclelease.co.uk