Should you lease an electric car through your Ltd Company?

Leasing is not a new concept and has been around for a long time. They have grown in popularity because they provide drivers access to the latest makes and models of cars at an affordable monthly price, as opposed to buying a car outright.

Typically, leases run for 24/36/48 months and you return the car at the end of this period and either take a newer model on a new lease or move on to something else. Essentially you are renting the car for this period, with one monthly payment that bundles all the cost into one payment (car rental, insurance, maintenance and breakdown cover).

Leasing costs vary significantly depending on the make and model of the car you choose, the length of the lease and any other considerations (such as mileage limits). Make sure you understand what you are signing up to and whether you can afford the monthly payments!

This section will start to get into the numbers with a worked example, please bear with us through this as the saving is worth it!

In this scenario, we will consider the cost of a lease taken by an individual and by a business.

We will assume the cost of the lease is £500 per month for both the individual and the business, i.e. the car is available on the same terms.

An overview of the costs and savings to consider are:

• VAT
• Benefit in kind for the company
• Corporation tax
• Benefit in kind for the employee
• Dividend tax for the employee

One immediate saving a business can make is that if it is VAT registered, 50% of the VAT is recoverable

£500 / 1.2 = £416.67 (Net cost of the lease excluding VAT)

£83.33 VAT

£41.67 50% of VAT recoverable each month

HMRC assume that the car will be available for personal use and hence cap that recoverable VAT at 50%.

So the cash cost to the business to the lease company ends up being £458.34 per month.

There is an employers national insurance charge related to the benefit in kind for the employee which the company must pay and is calculated based on the benefit in kind percentage multiplied by the list price of the electric car multiplied by the employers national insurance charge. Lots of numbers and rates that can start to make your head spin!

If the list price of the car is £40,000, the benefit in kind percentage for electric cars is 2%. So the value of the benefit in kind to the employee is:

£40,000 x 2% = £800

Employers national insurance is 13.8%, therefore the cost to the company is:

£800 x 13.8% = £110.40 per year or £9.20 per month

If you are a small business, claiming the employment allowance, this national insurance cost may also be recoverable! If not, then the net cost to the business for the lease per month is £467.54.

This is an allowable cost for corporation tax purposes, so there is a corporation tax saving available - at the lowest rate of corporation tax (19%), this is £88.83 per month, reducing the cost to £378.70 (the higher rates of corporation tax will save you more!).

The final point to consider is the benefit in kind tax for the employee - the benefit in kind is calculated in the same way as for the company, i.e. £800, however the cost is dependent on your income tax band (20% basic rate / 40% higher rate / 45% additional rate). If we assume the higher rate of tax, the cost to the employee is:

£800 x 40% = £320 / 12 = £26.67 per month.

The total cost to the company and the individual is therefore £405.37, a £94.63 saving vs the standard leasing cost to do it personally!

Another important point to consider when leasing personally, is that you will need to get this money out of your business in order to pay the lease cost. If we continue to assume you are a higher rate taxpayer, the amount you need to take out the business will be subject to dividend tax at 33.75%, which is:

£500 / 66.25% = £754.72

The true cost is therefore £754.72, with £500 paid to the leasing company and £354.72 paid in dividend tax to HMRC!

The saving of taking the lease through the company is therefore 46% or £349.35 per month - £4,192.20 per year.

If you want to know more, get in touch with the Bright Beany Accounting team today.