However, certain lease rental restrictions apply, depending on your car’s CO2 exhaust emissions.
The lease rental restriction bands
- If your car has CO2 emissions of 130g/km or less, 100% of the lease costs can be offset against taxable income.
- Business cars with emissions of 131g/km or more have a 15% restriction (ie only 85% is claimable against taxable income).
How do the lease rental restrictions apply to the self-employed?
For sole traders and partnerships, the same restrictions apply minus any private element – usually about 20% (HMRC will want to see detailed records if you are claiming for more.
How does this work in practice? For example, if 20% of your motoring is private, then 80% of the business car lease rental can be set against tax if the car has CO2 emissions below 130g/km.
So if your personal contract hire lease was £250 a month, then you would reduce the £250 figure by 20% = £200, which would be the amount you could offset against taxable income. As long, of course, as the car was below 130g/km CO2.
The current system for calculating car lease rental restrictions has been in place since March 2009; it replaced the expensive car leasing disallowance – a complicated formula which the current system happily simplifies.
The lease rental restriction applies to the lease plus any blocked VAT – the ‘effective rental’ as it is sometimes called in the industry.
That means for most businesses, 50% of the VAT cannot be claimed since there is a private use element of the car.
Lease rental restriction only apply to cars; they do not apply to vans.
Lease rental restrictions – be prepared for future changes
- The current lease rental allowances will change from April 2018.
- For details of the future lease rental restrictions click here.