I need a new van, should I lease or buy it on hire purchase?
This is a common question for business owners and can seem confusing, especially when there's a salesman trying to close a deal, but it could have significant effects on the tax you pay!
Leasing
When you lease a vehicle you effectively pay a monthly rent.
This monthly rent will reduce your profits at the year end and therefore reduce your tax.
The tax relief is therefore real time.
i.e. monthly rents of £250 will cost you £3,000 over the year. Assuming you are a sole trader in the basic rate tax band, you would save £870 in tax.
Hire purchase
When you buy a vehicle on hire purchase you own the vehicle from the beginning and then repay a loan to the finance company. Assuming the vehicle is a commercial vehicle ie. Van or pickup etc. you can claim capital allowances and get tax relief for the cost of the vehicle against your taxable profits for that year.
i.e. Van cost £15,000 and monthly repayments are £300 (finance over 5 years paying £3,000 interest).
You would be able to take £15,000 off your profits in the year the van was purchased and brought into use. You would also be able to take the cost of the interest on the payments that year away from your taxable profits.
This would save you £4,524 in tax in the year you buy the van (assuming you have enough profits).
What should I do?
If you’re looking to reduce your tax in the year, then hire purchase may be the way to go. You’ll get the whole cost of the vehicle to offset against your profits.
Beware that you can only claim this once, where as with leasing you’ll claim a lower amount but you’ll claim it every year you’re leasing.
If you’re looking for a cashflow advantage then leasing might suit you better. The monthly payments are usually lower than hire purchase.
Beware of any additional charges for additional mileage or damage to the vehicle.
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