‘Should I lease or buy a car?’

There is no right or wrong answer to the question, it is ultimately a personal choice, and has to be what works best for you. We can, however, advise on the benefits of both leasing and purchasing so that you can make an informed decision about your new car.

Your options

You have some different options to consider when you are looking for a new car. You can:

  • Purchase the car outright
  • Have a hire purchase agreement (not to be confused with leasing as you will own the car at the end of equal repayments)
  • Personal Contract Purchase (where you repay the depreciation of the car and have the option to buy at the end of the agreement with a balloon payment)
  • Rent (contract hire) 

In this article, we will look at the differences between leasing and purchasing a car. It is important to note that in both scenarios below, the claims will be restricted subject to how much you use the vehicle privately.

Leasing a car

When you lease a car you are charged for the “provision of a service” (car hire), therefore you will incur VAT on the monthly rental costs.

As a VAT registered trader, you can reclaim on your VAT return 50% of the VAT incurred each month , even where the vehicle is also used for private use. The net amount of your monthly payment and the remaining 50% of the VAT is included in your accounts as an expense. This reduces the taxable profits, meaning it also reduces your tax bill.

You should bear in mind that when leasing a car you will not own the car at the end of the agreement period and will simply hand it back.  You will agree an annual mileage allowance in advance, and any excess above this will incur a charge.  Unless you include the maintenance option with the agreement, you are also responsible for any repairs and maintenance and therefore may incur additional costs.  All such additional costs will also be included in your accounts as an expense.

Buying a car

Whilst you cannot reclaim VAT on the initial purchase, you can claim capital allowances on the full cost of the car on your self assessment tax return. The amount you can claim will be determined by the CO2 emissions of the car.  For example, cars of 50g/km or less (low emissions) will attract 100% capital allowances in the year of purchase. This means that you will receive your full tax savings in the year of purchase, rather than it being spread over the ownership period.

If your car has emissions of more than 50g/km your claim to capital allowances is restricted to 18% or even 8% where the emissions is considered high (above 110g/km). Claims will be made year on year on the reducing balance of the car with a deduction for any private use. Tax relief is spread over the lifetime of ownership of the car.

When you do come to sell your car there will be a final adjustment, either a balancing allowance or a balancing charge.  This depends on whether you have had more or less tax relief than the resale value.  Usually, low emission cars that have had full tax relief upfront will incur a tax charge (balancing charge) on the resale value, whilst higher emission cars will often be due further tax relief (balancing allowance) on the difference between the capital allowances claimed each year and the resale value. 

The difference between ownership of regular and low emissions cars

Cars purchased now are allocated to different capital allowance ‘pools’ according to their CO2 emissions as follows:

  • New cars, CO2 emissions are 50g/km or less - 100% first year allowances
  • New cars, CO2 emissions are between 50g/km and 110g/km - 18% (main rate) allowance
  • Second hand cars, CO2 rating 110g/km or less - 18% (main rate) allowance
  • All other cars, CO2 emissions above 110g/km - 8% (special rate) allowance

Decision time!

In essence, tax reliefs are available on the cost of cars, regardless of whether you buy or lease, it is often the timing of the tax relief that makes a difference.

The best way to make a true cost comparison is to compare the same car with both options.

If you have any questions or would like further or specific advice, please get in touch.