Leasing a car on a personal lease vs withdrawing LTD funds to buy it for cash?
Every book, radio show or podcast for people wanting to become/stay wealthy would advise against leasing a car.
I agree a car itself is an expensive toy and lease even adds to this equation, but...
If I have a choice of buying a car, for which I would need to withdrawal my limited company funds and hitting higher tax bracket of 32.5%, or, leasing it via personal car hire, wouldn't it make more sense to lease it?
Let's say the car costs £25k
- it means I would have to pay £8125 in tax which totals to £33,125.00 or
- pay an initial payment of £1,800.00 + let's say 24 * £300 which totals to £9,000.00
I am assuming that for the yearly lease cost, I would have to pay the higher bracket tax because the funds would be withdrawn from my LTD company account which is £2,925.00 thus the total cost of the lease is £11,925.00.
Now, if it was a purchase of the car for cash, in 2 years the car would lose value, I think it's safe to say it would lose £5,000.00 over 2 year period.
So I could sell it for £20,000.00.
From the above calculations, it seems that if I was planning to drive the car for two years, it's cheaper to lease it than buy it for cash under these circumstances.
Summary:
Note: Higher tax bracket on dividends over £32,000.00 a year is 32.5% - I am assuming I have already reached the limit of £32k
Lease:
initial cost: -£1,800.00
initial tax: -£585
ongoing cost: -£300/month
ongoing tax: -£97.5/month
lost value of car: £0
total: -£11,925.00
Cash:
initial cost: -£25,000.00
initial tax: -£8,125.00
ongoing cost: £0
ongoing tax: £0
lost value of car: -£5000 (over 2 years)
car sold: +£20,000.00
total: -£18,125.00
I am not taking under consideration car insurance, fuel nor repair costs as these are irrelevant for the purpose of this question.
Am I missing something or the financial advisory books just focusing on people working as employees?
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You will pay tax whenever you take money out of your company, so you can’t compare the amounts like that. Money in your pocket that has already been taxed is worth more to you than the same amount of money sitting in your company, just like money in an ISA is worth more than the same amount of money in a pension. But in any case, I would suggest buying an older second hand car instead. You can get a perfectly good car for £5,000.
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