Thinking of leasing a car for your business instead of buying one outright? Here's how you deduct car lease payments from your tax return as a sole trader and as a limited company.
As a sole trader, you can deduct the business proportion of your actual costs or apply HMRC's approved mileage rates to your business mileage. The second method is simpler, but you can only do it if you're not VAT registered. You need to register for VAT if your yearly turnover is over £85,000.
Once you pick a method, you have to stick with it for as long as you have the car. You can't switch from one method to the other.
In either case, you'll need to keep an accurate record of your business mileage. You can do this manually, for example by logging your business drives on a spreadsheet. Or, even better, use an app like MileIQ. This automatically tracks your drives and lets you categorise them as business or personal.
Let's say you've leased a car for £200 per month. Your lease payments include road tax, servicing and your annual MOT.
In 2017 / 18, your insurance cost £300 and you spent £3,000 on petrol. This means the total cost of your car lease was (£200 x 12) + £300 + £3,000. So, £5,700 in total.
During the year, you made 12,000 miles. 6,000 were business miles, while 6,000 were personal miles. So, the business proportion of your car lease costs is (6000 / 12000) x 100, or 50 percent.
The car emits 135g/km. This means you have to deduct the 15 percent lease rental restriction.
You can, therefore, deduct 35% of your actual car lease costs from your tax return. In other words: £1,995.
Multiply your business mileage by the applicable mileage allowance rates.
HMRC's current Approved Mileage Allowance Rates, or AMAP are:
Using our previous example, the tax deduction would be 6,000 miles multiplied by 45p per mile. In other words: £2,700.
HMRC considers you and your limited liability company to be two different persons. So, leasing a car through your company has tax implications for the company and for you.
You can deduct all your car lease costs (less the lease rental restriction, if applicable) from your company's tax return. However, the car will count as a benefit-in-kind on your personal tax return.
To deduct your car lease payments from your LLC's tax return: