What are the tax benefits of leasing a car?
Setting up a vehicle lease contract lets you take advantage of a bundle of car leasing tax benefits. With a business lease deal, your company can make significant VAT savings on the monthly payments, as well as several other tax benefits.
Car leasing tax benefits
- You can keep the vehicle costs off your balance sheet, and this means you can free up credit for other areas of the business.
- You can claim back 100% of the VAT on payments – as long as the vehicle is solely used for business purposes. This amount reduces to 50% if the car is also used for personal journeys.
- You can offset up to 100% of the cost against your tax bill. The amount you offset on the emissions of your chosen vehicle. However, if you lease a van, you can offset 100% of the cost against your tax bill, regardless of the emissions.
- If you choose to add a maintenance or excess mileage package, you can claim 100% VAT back on the service charge and offset 100% of the cost against your tax bill. Good, yes?
Other things to consider before taking a company car lease:
- It’s not all good news, though. If you offer vehicles to employees as company cars, you will be expected to pay a higher rate of national insurance.
- The employee(s) will have to pay Benefit in Kind tax (BiK). That’ll go down well!
Are car leasing payments tax-deductible?
Car leasing payments are tax-deductible, and you can claim:
- Up to 50% of the tax paid on the monthly payments of your lease
- Up to 100% of the tax paid on a maintenance package
The cost of leasing a car can also be deducted from your taxable profits. The amount deductible depends on the CO2 emissions of your chosen vehicle.
To qualify for car leasing tax benefits, the vehicle must be considered a company car and used primarily for business purposes. Oh, and your company must also be VAT-registered. The lease vehicle can also be used for personal journeys, but at least 50% of the driving must be business-related.
Company car tax
So, long story short, if your employer has given you a car that you can use for both work and personal use, then in the eyes of HMRC, that vehicle is deemed a ‘company car’ and, as such, a ‘taxable perk’.
When it comes to company cars, the amount of benefit-in-kind tax (BIK tax) you’ll pay depends on the list price of the vehicle. But it will also depend on:
- the car’s CO2 emissions (in grams per kilometre)
- the type of fuel it uses
- your income tax rate or band.
What is BIK tax?
If you’re an employee or company director, you might receive certain benefits from your company, such as:
- Accommodation
- a loan
- a company car.
Some of these benefits are tax-free, but you’ll need to pay taxes for certain things like housing or a vehicle provided by your employer (if you’ve chosen to have these). The amount of tax, otherwise known as BIK tax, that you end up paying on these ‘company perks’ will depend on a few different factors – including the value of the benefit.
Reducing your company car tax
By this point, you’re probably wondering if there are ways to reduce your BIK payments or company car tax, yes?
Well, only using the vehicle part-time or making contributions to the fees, are a couple of ways of doing so. However, there’s also the option of choosing an electric (EV) or low-emission vehicle as your company car.
Company car tax changes taking effect in 2025
The government has announced big changes to vehicle tax in 2025:
- VED for EVs – From April, electric vehicles won’t be exempt from Vehicle Excise Duty (VED). EVs will still benefit from lower rates compared to petrol and diesel
- An increase in taxes for high-emission vehicles – Cars with higher CO2 emissions will have increased first-year VED rates, in the hopes it will make more people turn to greener vehicles.
- Adjustments in company car tax – BIK rates for EVs will rise in increments, but will still be lower than traditional vehicles.
Impact on car leasing
- EVs – No doubt the introduction of VED is going to increase the cost of leasing them. But don’t forget the lower running costs, incentives and congestion charge exemptions.
- Hybrids – Plug-in hybrids (PHEVs) are still a good middle ground, hitting that sweet spot of low emissions and petrol/diesel flexibility.
- High-emission vehicles – Sadly, these will most likely become more expensive due to the increase in taxes.
Company car tax - how to find out what you need to pay
To figure out how much tax you’ll need to pay, you’ll first need to find out:
- P11d Value - the value of the vehicle including VAT, all the optional extras and delivery charge. This value doesn't include road tax charges or the registration fee. Your employer should have this value handy for you in their records. If you’re a company director, your dealership can give you this value.
- Benefit-in-Kind % - vehicles are organised into groups based upon the level of emissions they produce to give a benefit-in-kind percentage. The emissions of any vehicle will be on each relevant manufacturer website.
- Personal Tax Rate - the final factor to consider when calculating how much company car tax you pay is how much you earn. Payments depend on which income tax bracket you’re in. If you're in the 20% bracket, you’ll pay 20% of the taxable portion of the car's P11D value, if you’re in the 40% tax bracket, you will pay 40% of the taxable portion of the car's P11D value.
Here's a table to help you figure out which BIK rate you are eligible for.
| CO2 (g/km) | Electric range (miles) | 2023/24 (%) | 2024/25 (%) | 2025/26 (%) | 2026/27 (%) | 2027/28 (%) | 2028/29 (%) | 2029/30 (%) |
| 0 | N/A | 2 | 2 | 3 | 4 | 5 | 7 | 9 |
| 1-50 | >130 | 2 | 2 | 3 | 4 | 5 | 18 | 19 |
| 1-50 | 70-129 | 5 | 5 | 6 | 7 | 8 | 18 | 19 |
| 1-50 | 40-69 | 8 | 8 | 9 | 10 | 11 | 18 | 19 |
| 1-50 | 30-39 | 12 | 12 | 13 | 14 | 15 | 18 | 19 |
| 1-50 | <30 | 14 | 14 | 15 | 16 | 17 | 18 | 19 |
| 51-54 | 15 | 15 | 16 | 17 | 18 | 19 | 20 | |
| 55-59 | 16 | 16 | 17 | 18 | 19 | 20 | 21 | |
| 60-64 | 17 | 17 | 18 | 19 | 20 | 21 | 22 | |
| 65-69 | 18 | 18 | 19 | 20 | 21 | 22 | 23 | |
| 70-74 | 19 | 19 | 20 | 21 | 21 | 22 | 23 | |
| 75-79 | 20 | 20 | 21 | 21 | 21 | 22 | 23 | |
| 80-84 | 21 | 21 | 22 | 22 | 22 | 23 | 24 | |
| 85-89 | 22 | 22 | 23 | 23 | 23 | 24 | 25 | |
| 90-94 | 23 | 23 | 24 | 24 | 24 | 25 | 26 | |
| 95-99 | 24 | 24 | 25 | 25 | 25 | 26 | 27 | |
| 100-104 | 25 | 25 | 26 | 26 | 26 | 27 | 28 | |
| 105-109 | 26 | 26 | 27 | 27 | 27 | 28 | 29 | |
| 110-114 | 27 | 27 | 28 | 28 | 28 | 29 | 30 | |
| 115-119 | 28 | 28 | 29 | 29 | 29 | 30 | 31 | |
| 120-124 | 29 | 29 | 30 | 30 | 30 | 31 | 32 | |
| 125-129 | 30 | 30 | 31 | 31 | 31 | 32 | 33 | |
| 130-134 | 31 | 31 | 32 | 32 | 32 | 33 | 34 | |
| 135-139 | 32 | 32 | 33 | 33 | 33 | 34 | 35 | |
| 140-144 | 33 | 33 | 34 | 34 | 34 | 35 | 36 | |
| 145-149 | 34 | 34 | 35 | 35 | 35 | 36 | 37 | |
| 150-154 | 35 | 35 | 36 | 36 | 36 | 37 | 38 | |
| 155-159 | 36 | 36 | 37 | 37 | 37 | 38 | 39 | |
| 160-164 | 37 | 37 | 37 | 37 | 37 | 38 | 39 | |
| 165-169 | 37 | 37 | 37 | 37 | 37 | 38 | 39 | |
| 170+ | 37 | 37 | 37 | 37 | 37 | 38 | 39 |
Calculating your company car tax
Now that you know which car tax band your vehicle falls into, you can find out the taxable value of your car by multiplying the P11D value of your car by the CO2 tax rate from the table. Once you’ve got this figure, you then multiply it by your income tax rate (20%, 40% or 50%) to get the amount of BIK tax you need to pay.
While you’re likely to find a company car tax calculator with a simple online search, it’s as simple as this, really: P11d Value X Benefit-in-Kind % X Personal Tax Rate = Yearly BiK Tax
£25000 X 17% X 20% = £850
Keep in mind this calculation is an incredibly simplified scenario.
Everyone's calculation will vary depending on things such as:
- company car tax allowance
- salary sacrifice
- capital contributions
- salary
- fuel contributions and more.
Going forward with the new car tax
Now you know what company car tax changes are and how you can find out and calculate what you’ll need to pay, you may find it worth switching to an EV or more low-emission vehicle?
Still not sure? Don’t worry – get in touch!
