Understanding the 15% Block on Lease Payments for Corporation Tax

Time to Read: 4 minutes

When it comes to company cars and tax efficiency, one key rule businesses need to understand is the 15% block on lease payments for cars with high CO₂ emissions. This blog explains what it means, how it works, and what you can do to optimise your tax deductions.

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What Is the 15% Block on Lease Payments?

In the UK, if a company leases a car with high CO₂ emissions, it cannot deduct the full cost of the lease payments when calculating corporation tax. Instead, 15% of the lease cost is blocked (disallowed) from being claimed as a business expense.

This rule was introduced to encourage businesses to choose low-emission vehicles and reduce their environmental impact.

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When Does the 15% Block Apply?

The 15% block applies to cars with CO₂ emissions above 50g/km. For cars emitting 50g/km or lower, the full lease payment is deductible.

Quick Summary:

• Cars with CO₂ emissions ≤50g/km: 100% of lease payments are deductible.
• Cars with CO₂ emissions >50g/km: 85% of lease payments are deductible, and 15% is blocked.

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How Is the 15% Block Calculated?

If the leased car has CO₂ emissions above 50g/km, only 85% of the lease payments can be claimed as an expense. The remaining 15% is added back to taxable profits.

Here’s an example:

Example:

• Monthly Lease Payment: £600
• CO₂ Emissions: 120g/km (above the threshold)

Calculation:

• Deductible amount: £600 x 85% = £510
• Blocked amount: £600 x 15% = £90

In this case, £90 per month cannot be claimed, which increases your taxable profits and, ultimately, your corporation tax liability.

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Why Does the 15% Block Exist?

The 15% block is designed to promote environmentally-friendly choices. Cars with lower CO₂ emissions, such as electric or hybrid vehicles, receive more favourable tax treatment. By leasing a low-emission car, businesses can:

• Deduct the full cost of lease payments.
• Benefit from lower running costs.
• Align with sustainability goals.

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Tips to Minimise the Impact of the 15% Block

To reduce the impact of the 15% block on corporation tax, consider the following strategies:

1. Opt for Low-Emission Vehicles: Cars with CO₂ emissions of 50g/km or less avoid the 15% block. Electric vehicles (EVs) and plug-in hybrids are excellent options.
2. Compare Lease vs. Purchase: If leasing a high-emission vehicle, compare the costs with purchasing the car outright. The tax treatment for capital allowances may be more beneficial.
3. Plan for Long-Term Savings: Although low-emission cars may have higher upfront costs, the tax savings and lower running costs often make them more economical in the long run.
4. Review Your Fleet Regularly: Regularly review your company’s vehicle policy to ensure it aligns with the latest tax and environmental rules.

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Key Takeaways

• The 15% block applies to leased cars with CO₂ emissions above 50g/km.
• Only 85% of lease payments can be claimed as an expense for corporation tax purposes.
• Cars with emissions 50g/km or below are exempt from this restriction.
• Choosing low-emission vehicles not only saves tax but also reduces long-term costs and environmental impact.

By understanding and applying these rules, businesses can make informed decisions about their company cars and ensure they remain tax-efficient.

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Need More Advice?

At Taxes Done Right Ltd., we help businesses navigate the complexities of corporation tax and optimise their expenses. Whether you’re leasing a new company car or reviewing your current fleet, we’re here to assist.

Get in touch today to ensure your business stays on the road to tax efficiency!