Why is Business Contract Hire cheaper than Personal?

Is Business Contract Hire Cheaper Than Personal Contract Hire?

One of the questions we get asked a lot at OSV is ‘why is business contract hire cheaper than personal contract hire?’

It’s a completely valid question, of course, because you want the best deal you can get. And, if you can lease a car through a business, then you would want to know if that is the cheaper option.

There are a few reasons why business contract hire can be cheaper than personal. So in this article, we are going to talk about the main differences between the two, and why one might be cheaper than other.

What’s the difference between business contract hire and personal contract hire?

Firstly, let’s discuss the differences between the two lease agreements.

Business contract hire is essentially where your company leases a car (or cars) for 1 to 5 years at a fixed monthly payment. Obviously, it’s ideal for those who use their car for work as well as for personal reasons. There are benefits to business contract hire that make it an attractive option for many, but we’ll go into that a bit later.

Personal contract hire, on the other hand, is for a private individual. The person leasing the car will have the car for 1 to 5 years, paying a fixed monthly payment. At the end of the contract, they simply hand it back.

So essentially, they are the same concept, just for different situations.

Gold bentley continental GTC convertible driving

What are the pros of business contract hire?

One of the reasons business contract hire is so appealing is that it has a lot of benefits that personal contract hire does not. For example;

  • Tax benefits: If you are leasing a car through a VAT registered company, you can claim 50% VAT back on the monthly payments and 100% of the VAT of the maintenance agreement.
  • It frees up cash: If you lease a car instead of buying, you won’t have your cash tied up in a depreciating asset.
  • Better Accounting Solution: The finance commitments are “off balance sheet”. This means that the liability of the finance is not shown on the company accounts. This can be an attractive benefit for many.

What are the cons of business contract hire?

Although business contract hire is has so many positives, there are also a couple of disadvantages that you should be aware of. For example;

  • You won’t own the vehicle outright
  • You’ll be subject to fair wear and tear conditions at the end of the contract
  • Mileage restrictions could result in extra charges should you go over
  • The car has to be serviced throughout which will incur an extra cost (although there are maintenance agreements available which can help spread out the cost in your budget)
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What are the pros of Personal Contract Hire?

Of course, personal contract hire does have its benefits too. For example;

  • You get a new car every few years: One of the most attractive things about contract hire is that you get a new car every few years.
  • You don’t have to worry about depreciation: You don’t own the car and therefore aren’t responsible for selling it later on. This means that you won’t have to worry about the depreciation of the vehicle.
  • Fixed motoring cost: the monthly payments are fixed throughout the contract. This usually includes road tax and can, if you wish, include maintenance.
  • It boosts your image
    • Let’s be honest, a flash car impresses everyone and will make your friends envy you.
Hyundaii 40 Tourer in ice blue driving

What are the cons of Personal Contract Hire?

Similarly to business contract hire, personal contract hire also has its disadvantages. For example:

  • You don’t own the vehicle
  • Mileage and condition charges will apply if you go outside of the contracted terms
  • The car has to be serviced, which doesn’t tend to be included in the contract price (although many brokers will have maintenance agreements available for an additional cost).

Are there any extra costs with business contract hire?

There can be, yes.

If the car is used privately, then the car must be treated distinctly from all other assets owned by the company. The private proportion of the total usage must be calculated and disallowed from the total. A record must be kept to show what proportion of the annual mileage was business and what was personal.

If there is any personal usage on a business contract hire then there is no VAT tax benefit. It can only be claimed back when the vehicle is for business purposes only.

However, if your company vehicle is used for personal use then you can claim the monthly cost of the lease against profits. The percentage of how much you can claim back varies. If your car emits more than 160 g/km then you can claim 85% back. If it emits less, then you can claim 100% back. This is in an attempt at encouraging manufacturers to make cars that create less pollution.

There is also something called benefit-in-kind taxes that you will incur if you have a company car. This includes company car tax and if your company pays for your personal fuel, fuel benefit.

Tax return

How does company car tax work?

We are so glad you asked. If you use your business vehicle for personal use, then you will have to pay company car tax. This includes if you use it to drive to and from work.

You do not have to pay company car tax if your car is left at your place of work overnight and at weekends. Your employer will advise the HMRC that this is a ‘pool’ car, and therefore won’t have to pay company car tax.

How much company car tax will I have to pay?

The amount you have to pay is dependent on the CO₂ emissions and the P11d value. How much you pay a month is calculated by your income and what tax bracket you are in.

You can calculate how much you will have to pay at a website such as Comcar, who have their own company car tax calculator. You can also ask your broker or dealer to work it out for you.

That was a very brief rundown on company car tax, but you can read our article for a more in-depth look.

Blue Ford Fiesta - why is business contract hire cheaper than personal contract hire

Can I claim back business mileage with a personal contract hire?

 

Yes, you can. You must keep a record of all business mileage, of course. Then, your business can repay you 45p/mile for the first 10,000 miles and 20p/mile thereafter. This is done without you incurring any additional taxes. This is great if you don’t use your car that often for business, but use it occasionally.

Are the deals different with business contract hire?

 

Sometimes, manufacturers and suppliers will offer businesses better discounts. But, this isn’t always the case.

The best thing to do is to shop around and see what sort of deals are on offer.

Is business contract hire cheaper than personal contract hire?

 

So, is a business lease actually cheaper than a personal lease?

It all depends on your situation, basically. While the personal contract hire might cost you more monthly, you won’t have to pay company car tax.

However, if you are a VAT registered business then you can claim back the VAT. And, if you can’t, you can claim back the monthly cost of the lease against profits. The financial commitment to the car is “off balance sheet”, which is can be hugely beneficial to businesses.

If you don’t use your car for business that often, but do on occasion, then you can claim back business mileage.

Ultimately, it depends on your circumstances. Whether you choose to go for business contract hire or personal contract hire is entirely up to you. However, if you are still unsure or want more advice, our team are more than happy to help.

WANT TO KNOW WHETHER BUSINESS OR PERSONAL CONTRACT HIRE IS RIGHT FOR YOU?

Request a call back and one of our specialists will be in touch within one working day to discuss your options with you.

Chris Meek

Senior Vehicle Specialist at OSV Ltd
Chris enjoys: Champagne, walking the dogs and time with family.

He's known for a great joke and a big character, despite not being the loudest in the office. He's friendly and can be heard singing every so often. He likes treating each customer with an entirely unique approach, making sure every one of them knows they've got his full attention.
Chris Meek

5 Comments

  • Paula Young| 24th June 2019 at 5:29 pm Reply

    Really helpful advice, thanks. I’ve been so confused with other internet articles as they don’t quite seem to fit our circumstances. We are a limited company but not registered for VAT so didn’t think we’d benefit from a business lease.

    • Rachel Richardson| 25th June 2019 at 8:33 am Reply

      Hi Paula,
      We try and make the articles we write as helpful and comprehensive as possible. If you would like further advice, or would like to speak with someone about ordering a car on a business lease, please get in touch with Amanda in our office on 01903 223391 and she will be able to direct you to one of our vehicle experts.

  • Emeric| 8th August 2018 at 11:13 am Reply

    The most informative and helpful post I’ve seen on this topic. Very good succinct summary. Thank you.

  • New Car Deal| 17th July 2018 at 10:03 am Reply

    Great post! I’ve just taken out an alfa romeo on BCH and it’s been one of the greatest decisions i’ve made

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