Why is Business Contract Hire cheaper than Personal?

We get asked a lot of questions about car leasing at OSV, and one One of the questions we get asked a lot at OSV is ‘why is Business Contract Hire cheaper than Personal Contract Hire?’

It’s a completely valid question, of course, because everyone wants the best deal available. If you are able to lease a car through a business, then you will definitely want to know if that’s the lower-priced option.

There are a few reasons why Business Contract Hire can cost less than Personal Contract Hire. So in this article, we are going to talk about the main differences between the two, and why one may work out to be cheaper than the other.

What’s the difference between Business Contract Hire and Personal Contract Hire?

Firstly, let’s discuss the differences between the two Contract Hire agreements.

Business Contract Hire is essentially where your company leases a car (or multiple cars for a fleet) for 1 to 5 years at a fixed monthly rate. This kind of arrangement is ideal for you if you use your car for work and personal purposes.

There are benefits if you use Business Contract Hire to get your vehicle, which make it an attractive option for many, but we’ll go into that a bit later.

Personal Contract Hire, on the other hand, has been set up for use by private individuals. If you are leasing a vehicle for personal use you will have the car for between 1 and 5 years and will be making a fixed monthly payment. At the end of the contract, you hand the vehicle back to the Finance House.

So essentially, both agreements function in the same way, but they are designed for different situations.

What are the pros and cons of Business Contract Hire?

As with any financial contract, there are pros and cons that have to be carefully considered before you sign on the dotted line.

What are the pros of Business Contract Hire?

One of the biggest reasons that Business Contract Hire is so appealing is due to the fact that there are many benefits to it that Personal Contract Hire doesn’t have, such as:

• Tax benefits
  • If you’re leasing a car through a VAT registered company, you can claim 50% VAT back on the monthly payments and 100% of the VAT of the maintenance agreement.
• It frees up money
  • If you lease a car instead of buying, your money won’t be tied up in a depreciating asset.
• It’s a better accounting solution
  • The financial commitments associated with the lease are “off balance-sheet”. This means that financial liability doesn’t need to be shown on the company accounts. This can be an attractive benefit for many.

What are the cons of Business Contract Hire?

Although Business Contract Hire has a great number of positive aspects, there are also a few disadvantages that you should be aware of. These disadvantages include:

• You won’t own the vehicle outright
• You’ll be subject to fair wear and tear conditions at the end of the contract
• Mileage restrictions could result in extra charges should you go over
• The car has to be serviced throughout which will incur an extra cost (although there are maintenance agreements available which can help spread out the cost in your budget).

What are the pros and cons of Personal Contract Hire?

Business Contract Hire has a lot of advantages and if you qualify for it then it’s definitely worth considering. However, that’s not to say that getting a new lease car on Personal Contract Hire is without its own advantages and disadvantages.

What are the pros of Personal Contract Hire?

• You get a new car every few years: One of the most attractive things about contract hire is that you get a new car every few years.
• You don’t have to worry about depreciation: You don’t own the car and therefore aren’t responsible for selling it later on. This means that you won’t have to worry about the depreciation of the vehicle.
• It’s a fixed monthly expense:
  • The monthly payments are fixed throughout the contract. This usually includes road tax and can include maintenance of the vehicle if you decide this is an option you would like.

What are the cons of Personal Contract Hire?

Just like Business Contract Hire, there are some disadvantages to Personal Contract Hire also has its disadvantages. For example:

• You don’t own the vehicle
• Mileage and condition charges will apply if you go outside of the contracted terms
• The car has to be serviced, which doesn’t tend to be included in the contract price (although many brokers will have maintenance agreements available for an additional cost).

Are there any extra costs with Business Contract Hire?

It is possible, but this depends on how you are planning on using the vehicle.

If you are intending to use the car as a business and private vehicle, then it has to be treated separately from all other assets owned by the company.

The private segment of the total usage must be calculated and disallowed from the total. A record must be kept to show what proportion of the annual mileage was business and what was personal.

If there is any personal usage on a business contract hire then there is no VAT tax benefit. It can only be claimed back when the vehicle is for business purposes only.

However, if your company vehicle is used for personal use then you can claim the monthly cost of the lease against profits. The percentage of how much you can claim back varies. If your car emits more than 160 g/km CO₂ then you can claim 85% back. If it emits less, then you can claim 100% back. This is in an attempt at encouraging manufacturers to make cars that create less pollution.

There is also something called benefit-in-kind taxes, that you will often see referred to as BiK, that you will incur if you have a company car. BiK will include Company Car Tax and other expenses such as Fuel Benefit if your company pays for your personal fuel.

How does Company Car Tax work?

If you use your business vehicle for personal use, including using your vehicle to drive for your daily commute to work, then you will have to pay Company Car Tax.

You do not have to pay Company Car Tax if your car is left at your place of work overnight and at weekends. Your employer will advise the HMRC that the vehicle you drive this is a ‘pool’ car and, therefore, won’t have to pay company car tax for the vehicle.

How much Company Car Tax will I have to pay?

The amount you have to pay is dependent on the CO₂ emissions and the P11d value. How much you pay a month is calculated by your income and what tax bracket you are in.

If you would like to find out more information about how much Company Car Tax you will have to pay, there are calculators available on many sites, including Comcar, You can calculate how much you will have to pay at a website such as Comcar, or the official HMRC website. You can also ask your broker or dealer to work it out for you.

My vehicle is on Personal Contract Hire, can I claim back business mileage?

The short answer is that yes, you can.

Of course, you must keep an accurate record of all business mileage that you can then give to your employer or business. The business can then repay you 45p per mile for the first 10,000 miles and 20p per mile thereafter.

This can be done without you incurring any additional taxes, which is great if you don’t use your car that often for business, but use it occasionally.

Are different offers available on Business Contract Hire?

Sometimes manufacturers and suppliers will offer businesses better discounts. But, this isn’t always the case. As with any large purchase, we would recommend you compare offers available across multiple suppliers.

If you are looking for a vehicle and would like a lease created around your needs, get in touch with the team at OSV.

The best thing to do is to shop around and see what sort of offers are available.

Is Business Contract Hire cheaper than Personal Contract Hire?

So, is a business lease actually cheaper than a personal lease?

It all depends on your situation. Though Personal Contract Hire could mean you have higher monthly payments, you will have to pay Company Car Tax if you have a vehicle on Business Contract Hire.

However, if you are a VAT-registered business then you can claim back the VAT. If you are unable to do this then you can claim back the monthly cost of the lease against company profits. The financial commitment for the car is “off balance-sheet”, which can be hugely beneficial to businesses.

If you don’t use your car for business that often, but do on occasion, then you can claim back business mileage.

Ultimately, it depends on your circumstances. Whether you choose to go for Business Contract Hire or Personal Contract Hire is entirely up to you. However, if you are still unsure or want more advice, our team are more than happy to help.

WANT TO KNOW WHETHER BUSINESS OR PERSONAL CONTRACT HIRE IS RIGHT FOR YOU?

Request a call back and one of our specialists will be in touch within one working day to discuss your options with you.