Nowadays, leasing is not just for businesses but also for private individuals and they work along the same lines with the same concept.
However, when looking at leasing deals, you may have noticed a significant difference between business and private leasing costs. There are some deals that are cheaper on business contract hire than they are on personal contract hire. And you may be wondering why.
In this article, we look at the different types of lease contracts for business and personal, and why business leasing is cheaper than personal leasing.
What are the different types of business leasing?
Business leasing is extremely popular. There are three different types of business leasing. They are;
- Business Contract Hire
- Finance Lease
- Operating Lease
A Business Contract Hire is one of the most popular forms of leasing. You own a car for a few years, paying a set monthly fee. When the contract is up, you hand the car back with nothing more to pay (subject to mileage and condition restrictions). Business Contract Hire is great for those who don’t want to worry about depreciation and want to change their fleet every few years. You can watch our Contract Hire video below.
A Finance Lease is great for companies whose fleet are going to be doing high mileage or will be suffering from more fair wear and tear. It is also great for those who will be having refrigeration units in their vehicles. A finance lease works in the same way as a contract hire where you pay a monthly fee for a set period of time. However, at the end of your contract you will have to find a buyer to purchase your vehicle. This money will pay off the remainder of your contract. Alternatively, you can extend your contract for a nominal fee which is usually the cost of one monthly payment. You can watch our Finance Lease video below.
An operating lease works the same as a contract hire. However, the difference is that the road tax is only included in the first year of the contract. After that, you will have to pay for it yourself. You only find operating leases with Mercedes finance these days.
What personal lease options are there?
If you want to lease personally, then you will be looking at Personal Contract Hire. This is exactly the same as Business Contract Hire but for a private individual rather than a business. You will still have to make monthly payments for a set period of time. After that time is up, you will hand the car back with nothing more to pay (subject to mileage and condition restrictions). You can watch our video on Personal Contract Hire below.
There will be occasions where it is cheaper to lease through a business than it is personally. This is often down to the fact that manufacturers tend to offer better deals for business than they do for personal leasing. It’s as simple as that.
So, the reason business leasing is cheaper is because vehicle suppliers are able to access better discounts because that’s essentially what is on offer. Also, many will have access to fleet discounts which are exclusive to business customers.
Business leasing can also be cheaper than personal because you can claim the VAT back. This is only if you do not use your lease car for personal use. If you do use your car for personal use, then it will have to be treated distinctly from all other assets owned by the company. The private proportion of your private mileage will be disallowed from the total and a record will be kept to show what portion of the annual mileage was business mileage and what wasn’t. If your lease car is not used for personal mileage, then you will be able to claim the VAT back.
However, you can claim the monthly cost of the lease against profits. The amount you can claim back varies depending on how much CO2 your car emits. If it emits more than 160g/km of CO2 then you can only claim back 85%. If it’s any less than that, you can claim back 100%.
Although, if you use your car for personal mileage, you will also have to pay for company car tax.
What is company car tax?
Company car tax is pretty self-explanatory. It’s a tax that you have to pay to have a company car. You pay company car tax if you are using your car for personal use, which includes driving to and from work.
The amount you will pay in company car tax depends on the CO2 emissions and your personal tax bracket. Essentially though, the lower the CO2 emissions, the lower the company car tax.
You can read more about company car tax here.
Is it cheaper to lease through a business or privately?
While the deals can be cheaper with business leasing, you do have to pay company car tax. So, you could argue that it could be cheaper to lease privately. Is it?
It really depends. There have been cases where a customer has wanted to lease through a business but the company car tax rate for the car has been through the roof. So instead we have recommended they lease privately. However, in a lot of cases, it is still cheaper to lease through your business.
As well with business leasing, the finance can be “off balance sheet” and you can claim back the VAT or claim the monthly cost of the lease against profits. So business leasing is still very appealing, even with the added cost of company car tax.
But, as we said, it’s really down to the car and the individual situation.
What is the criteria for leasing through a business?
Apart from being, well, a business, there is some other criteria to be able to lease a car through your business.
When you apply for a business lease, you will have to provide your company accounts and audits. This is to make sure that you will be able to make the monthly payments. The finance house will also look at your company’s credit history. It’s the same process as if you were to lease privately but instead of looking at your private credit history they will look at your business.
Hopefully this has cleared a few things up and helped you on your way to deciding which lease contract is better for you, personal or business. There are VAT benefits to leasing a car through your business rather than privately. However, when you have a company car you may be eligible for company car tax. Depending on the car, this could make leasing through a business more expensive than if you were to lease privately. Ultimately, though, it’s down to you which you decide.