Tax Benefit on Car Lease For Salaried Employees in the UK

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What is the tax benefit on car lease for employees?

As a salaried employee in the UK, you might dream of driving a brand new car without the hefty price tag or long-term ownership commitments. Thankfully, car leasing offers an attractive solution with flexibility and financial advantages. But did you know that car leasing can also come with tax benefits? Yes, you heard it right! Understanding the tax implications and exploring the available tax deductions allows you to save money while cruising in style.

In this blog post, we will delve into car leasing and unravel the tax benefits it offers salaried employees in the UK. From understanding taxable benefits to exploring capital allowances and tax deductions, we’ll guide you through the intricacies of the tax system to help you make informed decisions and maximize your savings. So, fasten your seatbelts as we embark on a journey to discover how car leasing can enhance your driving experience and boost your financial well-being.

1- Company Car vs. Personal Contract Hire (PCH)

Choosing between a company car and a Personal Contract Hire (PCH) agreement has different tax implications. Company cars can result in taxable and fuel benefits, subject to income tax and National Insurance Contributions (NICs). On the other hand, PCH agreements are personal expenses, meaning there are no tax implications or opportunities for tax relief.

A company car is a vehicle provided by an employer for an employee’s use for business and personal purposes.
The tax implications for company cars are based on the car’s value, carbon dioxide (CO2) emissions, fuel type, and the employee’s tax rate.
The employee is liable for paying tax on the “Benefit in Kind” (BIK), which is the car’s value provided for personal use.
The BIK value is calculated by multiplying the car’s list price (including accessories) by the appropriate percentage based on CO2 emissions and fuel type.
The employee will also pay tax on any fuel provided for personal use unless they reimburse the employer for the fuel costs.
National Insurance Contributions (NICs) are payable by the employer and employee based on the BIK value.

2- Personal Contract Hire (PCH):

In the world of car leasing, Personal Contract Hire (PCH) has emerged as a popular option for individuals looking for a flexible and hassle-free way to drive a vehicle. PCH allows you to enjoy the perks of driving a brand-new car without the burdens of ownership. But what exactly is PCH, and what are the benefits it offers? Let’s dive in and explore the ins and outs of Personal Contract Hire.

-Affordable Monthly Payments: With PCH, you can enjoy lower monthly payments than traditional car financing or purchasing. Since you are renting the vehicle, your monthly payments are based on the depreciation and usage of the car during the lease term.

-Flexible Options: PCH offers flexibility regarding vehicle choice, lease duration, and mileage allowances. You can select a car that suits your preferences and needs, whether a compact city car or a luxurious SUV. Lease terms range from 2 to 4 years, allowing you to match the contract length to your desired timeframe. Additionally, you can choose the mileage allowance that aligns with your estimated annual driving habits.

-No Resale Hassles: One of the significant advantages of PCH is that you don’t have to worry about the resale value or the hassle of selling the vehicle. At the end of the lease term, you hand back the car to the leasing company. This eliminates the potential risks and uncertainties associated with vehicle depreciation and market fluctuations.

-Manufacturer Warranty: When you lease a new car through PCH, it is usually covered by the manufacturer’s warranty for the lease term. This provides peace of mind as the manufacturer typically covers any mechanical issues or repairs that fall within the warranty period.

-Fixed Budgeting: PCH allows easy budgeting as your monthly payments are fixed throughout the lease term. This can be beneficial for individuals who prefer stable and predictable expenses.

3- Tax Implications for Company Cars-

Company cars attract taxable benefits based on the list price, CO2 emissions, and availability for personal use. Employers are liable for Class 1A NICs on the taxable value of the car and fuel benefits provided.

Benefit in Kind (BIK) Tax: Employees who are provided with a company car for personal use are liable to pay tax on the “Benefit in Kind” (BIK) value of the car. The BIK value is calculated based on the car’s list price, CO2 emissions, and fuel type.
Car’s List Price: The BIK value is determined by multiplying the car’s list price (including any accessories) by a percentage. The percentage used depends on the car’s CO2 emissions. Generally, the higher the emissions, the higher the BIK value.
CO2 Emissions: The BIK percentage is based on the car’s CO2 emissions in grams per kilometer (g/km). The specific rates are subject to change, so it’s essential to refer to the latest HMRC guidelines for the applicable rates.
Fuel Type: The fuel type of the company car also affects the BIK percentage. Electric and low-emission vehicles typically have lower BIK percentages than petrol or diesel cars.
Personal Use: The BIK tax is applicable only for the personal use of the company car. If the employee uses the car solely for business purposes or pays for the private fuel separately, the BIK tax may be reduced or eliminated.
Income Tax and National Insurance Contributions (NICs): The BIK value is subject to income tax at the employee’s tax rate. Additionally, the employer and employee must pay NICs based on the BIK value.
Additional Taxes: Employees may be subject to additional taxes if they receive other benefits associated with the company car, such as free or subsidized fuel.

It’s essential to keep accurate business and personal mileage records to determine the correct BIK tax liability. Employers are responsible for reporting and deducting the appropriate tax amounts from employees’ salaries.

4- Tax Implications for Personal Contract Hire (PCH) -

PCH agreements involve personal vehicle leasing, and the rental payments are considered personal expenses. No tax implications or opportunities for tax relief related to PCH payments exist.

Income Tax: The monthly payments made for a Personal Contract Hire (PCH) agreement are not tax-deductible for income tax purposes. Individuals cannot claim tax relief on the monthly rentals.
Value Added Tax (VAT): VAT is payable on the monthly rentals for PCH agreements. The current standard rate of VAT in the UK is 20%. However, individuals can only reclaim this VAT if the car is used solely for business purposes.
Capital Allowances: Since the individual does not own the car in a PCH agreement, they cannot claim capital allowances for the vehicle. Capital allowances allow businesses to claim tax relief on the cost of buying certain assets, including cars used for business purposes.
Mileage for Business Use: If the individual uses the PCH car for business purposes, they can claim mileage expenses for business-related trips. The mileage rate can be deducted from the individual’s taxable income, subject to specific rules and limitations. It’s important to keep accurate records of business mileage for proper documentation.
Insurance and Maintenance: The cost of insurance and maintenance for a PCH car may only be tax-deductible if used solely for business purposes. Only the portion attributable to business use may be eligible for tax deductions if the car is used for personal and business purposes.
Personal Use: As PCH is primarily for personal use, there are limited tax benefits associated with it. However, consulting with a tax professional or referring to HMRC guidelines is crucial to determine any specific tax implications based on individual circumstances.

5- Capital Allowances for Business Use -

Businesses using vehicles for business purposes may be eligible for capital allowances. The Annual Investment Allowance (AIA) allows for a 100% deduction on qualifying assets, including cars, up to a certain limit. The Writing Down Allowance (WDA) applies if the car cost exceeds the AIA limit or if the car does not qualify for it.

Definition: Capital allowances are tax deductions businesses can claim on the cost of certain assets, including cars used for business purposes. They allow businesses to reduce taxable profits by deducting a portion of the asset’s cost yearly.
Eligibility: To claim capital allowances for a car, it must be used solely or mainly for business purposes. The car should not be used primarily for personal use. The exact criteria for determining business use may vary, so it’s important to consult HM Revenue and Customs (HMRC) guidelines or a tax professional for specific requirements.
Annual Investment Allowance (AIA): The AIA is a type of capital allowance that allows businesses to claim a 100% deduction on the cost of qualifying assets, including cars, up to a specific limit. The AIA limit is subject to change and should be checked with HMRC. The AIA provides accelerated tax relief by allowing the full cost of the car to be deducted in the year of purchase.
Writing Down Allowance (WDA): If the car’s cost exceeds the AIA limit or if the car does not qualify for the AIA, businesses can claim the WDA. The WDA is usually claimed at a rate of 18% per year on the remaining cost of the car.
Low Emission Cars: Cars with low CO2 emissions may qualify for enhanced capital allowances. These allowances provide higher rates of tax relief. The thresholds and rates for low-emission cars are subject to change and should be verified with HMRC.
Private Use Adjustment: A private use adjustment may be required if the car is used for business and personal purposes. This adjustment reduces the capital allowances claimable proportionately based on the car’s private use.
Record Keeping: It’s essential to maintain accurate business mileage and usage records to support the capital allowances claim. Documentation should include details of business trips, dates, mileage, and other relevant information.

6- Tax Deductions for Business Use-

Businesses can claim tax deductions for business mileage, where a specific rate is applied per mile traveled. Additionally, vehicle expenses incurred exclusively for business purposes, such as fuel, insurance, and maintenance, may be deductible. Only the proportion attributable to business use is deductible for vehicles used for business and personal use.

Business Mileage: If you use your vehicle for business purposes, you may be eligible to claim tax deductions for the mileage traveled. The mileage rate varies and is set by HM Revenue and Customs (HMRC). You can deduct a specific amount per mile driven for business purposes. Maintaining accurate records of business mileage to support your deduction claims is essential.
Vehicle Expenses: If you use a vehicle exclusively for business purposes, you can deduct the expenses related to its operation and maintenance. This includes fuel, insurance, repairs and maintenance, road tax, vehicle registration fees, and parking fees incurred for business purposes. Keep detailed records and receipts to substantiate your deductions.
Leasing or Hire Purchase Payments: If you lease or have a hire purchase agreement for a vehicle used solely for business purposes, the lease or hire purchase payments may be tax-deductible. However, if the vehicle is also used for personal purposes, you can only claim the proportion of payments attributable to business use.
Vehicle Financing Costs: If you have taken a loan or financing for a vehicle used exclusively for business, the interest paid on the loan or financing may be tax-deductible. Similarly, the interest charges may be deductible if you use a business credit card to make vehicle-related purchases.
Capital Allowances: Capital allowances allow you to claim tax relief on the cost of purchasing vehicles used for business purposes. The specific rules and rates for capital allowances can vary, so it’s essential to consult HMRC guidelines. Generally, you can claim a percentage of the vehicle’s cost as a capital allowance over time.
Other Business-Related Expenses: In addition to vehicle-specific expenses, you can deduct other business-related expenses incurred while using the vehicle for business purposes. This includes toll charges, parking fees, business-related travel expenses, and vehicle-related business equipment or accessories.

7- Value Added Tax (VAT) Considerations -

VAT applies to vehicle purchases and certain running costs. VAT on vehicles is usually at the standard rate, and businesses may be able to reclaim VAT if the vehicle is used exclusively for business purposes. VAT considerations also apply to leasing agreements and second-hand vehicle sales.

VAT on Vehicle Purchase: VAT is generally applicable when purchasing a vehicle. The VAT rate in the UK is currently set at a standard rate of 20%. However, certain vehicles, such as electric vehicles, may qualify for a reduced VAT rate. It’s important to check the latest HM Revenue and Customs (HMRC) guidelines for vehicle VAT rates.
VAT Reclaim for Business Use: If you use a vehicle for business purposes, you may be eligible to reclaim a portion of the VAT paid on the purchase, lease, or hire of the vehicle. However, VAT recovery is only applicable if the vehicle is used exclusively for business purposes. If the vehicle is used for business and personal use, you can only reclaim the VAT proportionate to the business use. Proper record-keeping is crucial to support your VAT reclaims.
VAT on Vehicle Running Costs: VAT also applies to vehicle running costs, such as fuel, maintenance, and repairs. You can generally reclaim the VAT paid on these expenses for business use, provided they are solely for business purposes. If the vehicle is used for business and personal use, you can only reclaim the VAT proportionate to the business use.
VAT on Vehicle Leasing and Hire: If you lease or hire a vehicle for business use, VAT is generally applicable on the monthly rentals. The VAT rate on the rentals is the same as the standard rate, unless the vehicle qualifies for a reduced rate. As a business, you can generally reclaim the VAT paid on the rentals, but only if the vehicle is used exclusively for business purposes.
VAT Flat Rate Scheme (FRS): The VAT Flat Rate Scheme is an alternative method of accounting for VAT for small businesses. Under this scheme, businesses pay a fixed rate of VAT based on their industry sector. While the scheme simplifies VAT accounting, it generally restricts businesses from reclaiming VAT on purchases, including vehicle-related expenses. Therefore, the VAT Flat Rate Scheme may impact the ability to reclaim VAT on vehicle-related costs.
VAT Margin Scheme for Second-Hand Vehicles: The VAT Margin Scheme may apply for second-hand vehicles purchased from a VAT-registered dealer. Under this scheme, VAT is payable on the difference between the purchase price and the vehicle’s resale price. This can be advantageous for businesses selling second-hand vehicles, as VAT is only paid on the profit margin.

8- National Insurance Contributions (NICs) -

NICs are payments made by employees and employers to fund state benefits. NICs are calculated based on earnings and have different rates and thresholds. Employers are responsible for paying Class 1A NICs on taxable employee benefits, including company cars.

Overview: National Insurance Contributions (NICs) are payments made by employees and employers to fund various state benefits and services in the UK, such as the National Health Service (NHS), state pensions, and social security benefits. NICs are separate from income tax and are calculated based on earnings.
Employee NICs: Employees are liable to pay NICs on their earnings, which include salary, bonuses, and certain taxable benefits, such as a company car. The NICs are calculated based on different earnings thresholds and rates. The rates and thresholds are subject to change and can be found on the HM Revenue and Customs (HMRC) website.
Employer NICs: Employers are also required to make NIC contributions on behalf of their employees. The employer NICs are calculated based on the employee’s earnings above a certain threshold. The rates and thresholds for employer NICs differ from those for employee NICs and can be found on the HMRC website.
Class 1 NICs: Class 1 NICs are the most common type and apply to employees earning above a certain threshold. They are split into two categories: employee contributions and employer contributions.
Class 2 and Class 4 NICs: Class 2 and Class 4 NICs apply to self-employed individuals. Class 2 NICs are a flat-rate weekly contribution, while Class 4 NICs are based on profits earned by self-employed individuals above a certain threshold.
National Insurance Number: Every individual in the UK is assigned a unique National Insurance number, which is used to track and administer NICs. It is important to provide employers with the correct National Insurance number and accurately report it on tax and NIC-related documents.
Benefits and Entitlements: Paying NICs contributes towards eligibility for certain state benefits, such as the State Pension, Maternity Allowance, Employment and Support Allowance, and Bereavement Support Payment. The specific benefits and entitlements vary based on individual circumstances and NICs contributions.

9- Optional Remuneration Arrangements (OpRA)-

Optional Remuneration Arrangements (OpRA) are a set of UK rules introduced by HM Revenue and Customs (HMRC) to determine the tax treatment of specific salary sacrifice arrangements and other flexible benefit arrangements. OpRA rules were enacted on April 6, 2017, and apply to employees and employers.

Definition: An OpRA refers to an arrangement where an employee gives up the right to receive earnings (such as salary) in return for non-cash benefits or a cash alternative. It includes salary sacrifice, where employees sacrifice part of their salary for other benefits.
Tax Treatment: Under OpRA rules, the tax treatment of the benefit depends on whether it is considered “exempt” or “non-exempt” from tax and National Insurance Contributions (NICs).
a. Exempt Benefits: Some benefits remain exempt from tax and NICs even under OpRA, such as employer pension contributions, childcare vouchers, and specific workplace nurseries.
b. Non-exempt Benefits: The taxable value is usually higher than the cash alternative provided, or the value is given up for non-exempt benefits. The employee is then liable to pay tax and NICs on the taxable value.
Transitional Rules: Transitional rules were in place for arrangements that were in existence before April 6, 2017. These rules allowed certain benefits to retain their previous tax treatment until April 5, 2018. After this date, the OpRA rules entirely apply.
Salary Sacrifice Arrangements: Salary sacrifice arrangements involve employees giving up part of their salary in exchange for non-cash benefits. Under OpRA rules, most salary sacrifice arrangements are subject to the new tax treatment, potentially resulting in increased employee tax liabilities.
Car Benefits and OpRA: OpRA rules have specific implications for car benefits. Where a car is provided through a salary sacrifice arrangement, the taxable value is based on the higher of the cash alternative or the modified cash equivalent value. The modified cash equivalent value considers any salary sacrificed and the amount of the employee’s capital contribution.
Reporting and Compliance: Employers are responsible for correctly reporting and applying the OpRA rules for employee benefits. This includes accurately calculating the taxable value of non-exempt benefits and ensuring the correct amount of tax and NICs is deducted and reported to HMRC.

Employers and employees must understand the OpRA rules and their implications to ensure compliance with tax regulations. Employers should seek professional advice and consult HMRC guidance to apply the OpRA rules in their specific circumstances accurately. Employees should also consult their employers or tax advisors for information on how OpRA may affect their salary sacrifice arrangements and tax liabilities.