How to Deduct Car Lease Payments as an LLC

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.

How do I deduct car lease payments as a sole trader?

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.

How to deduct actual car lease costs:

• Step 1: Add your car lease payments plus other running costs such as petrol and insurance to get your total annual cost. Remember that in the UK, the tax year runs from 6 April to 5 April.
• Step 2: Find out the business proportion of your costs. To do this, tot up your business mileage and divide it by your total mileage for the year. Multiply the answer by 100 to get a percentage.
• Step 3: Multiply your actual car costs by the percentage in step 2.
• Step 4: Using the Vehicle Certification Agency's online tool, find out your car's CO2 emissions. If they're over 130g/km, deduct a further 15 percent from the answer in step 3. This is called the lease rental restriction. It applies to cars, but not to vans. The government intends to bring it down to 110 g/km as from 1 April 2018.

Deducting actual costs: Example

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.

How to deduct car lease costs using HMRC's mileage allowance rates

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.

How do I deduct car lease payments as a limited liability company (LLC)?

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:

• Step 1: Tot up your car lease payments plus any other expenses, such as insurance and petrol, which you paid through the company.
• Step 2: Use the Vehicle Certification Agency's online tool to find out your car's CO2 emissions.
• Step 3: If the car emits less than 130g/km, deduct the full amount in step 1.
• Step 4: If the car emits more than 130g/km, a 15 percent lease rental restriction applies. This means you can only claim 85 percent of the costs in step 1. The lease rental restriction doesn't apply to vans. However, the threshold will be 110g/km as from 1 April 2018.

How to find out your benefit-in-kind tax liability

• Use HMRC's company car and fuel benefit calculator to find out your car's market value, or P11D value.
• Multiply the P11D value by the applicable company car tax rate. This depends on the car's engine type and CO2 emissions.
• Multiply your answer by your highest personal tax rate. You'll have to pay HMRC this amount in taxes.
• Your company will also have to pay Class 1A National Insurance and file a P46 form.