Working out the total cost of ownership

Let’s talk Total Cost of Ownership (TCO). To some, car leasing can sound opaque, with many variables to consider. Weighed up against car ownership, these variables are not more complex; car leasing just throws up different variables. What TCO essentially means is understanding all of the costs you have to calculate in order to arrive at the whole cost of using (or owning) a vehicle.

For leasing, that includes monthly lease cost, the PCP cost, the cost of insurance, the cost of a road fund licence, the cost of fuel or charging, and any costs you’ve incurred with the dealership by not adhering to the terms of your lease.

TCO is the most accurate way of working out the best car leasing option for you, whether as a single business lease, a personal lease, or for a fleet. TCO can also be referred to as Whole Life Costs (although this is sometimes a more profound calculation). Whether just for your own pocket or in application to a whole fleet of company cars, TCO can be a simple evaluation to work out which car is best for you and your bottom line.

How to calculate your TCO

Basically, to calculate TCO we need to take into consideration the key running costs.

These include Business Lease Costs (or purchase and resale price, if you’re talking ownership rather than leasing). The TCO also includes fuel, taxation, maintenance, insurance and financing, as well as accident spending (although some choose to exclude accident spend, as the cost on average will apply similarly across different vehicles).

This data will help you to work out the TCO of this vehicle, and enable you to compare and evaluate different vehicles much more easily, making sure to choose the best lease option for your bottom line.

Calculate Costs

Since CO2-based emissions taxation was introduced a few years ago, and since manufacturers are required to provide more transparent mpg figures, the basic metrics you require to complete a calculation of your TCO are readily available.

The other factors you need to take into consideration are listed above, but will then depend somewhat upon personal and business circumstances. This is where your ‘real-world’ stats come in, from considering individual lease costs to insurance premiums to the employer’s National Insurance, for business and fleet leasing. Although it might sound a little complicated, all of these figures can resolve in a relatively straightforward series of spreadsheet calculations.

Why calculate my TCO?

By calculating your TCO, you then have one simple figure with which to compare all the vehicles you have in contention, even allowing you to compare across markets, for example by ascertaining whether to go for Electric Vehicle leasing or lease a traditional Combustion Engine Vehicle. The factors do vary, but usually include:

  • VAT reimbursement
  • Business car lease cost
  • Fuel spend (calculating only Business Miles if also used as a personal vehicle)
  • Maintenance (applying a budgeted spend. For fleet models, service intervals vary model to model, and must be adhered to in order to protect the fleet vehicle’s warranty)
  • The cost of National Insurance
  • The cost of vehicle insurance
  • The cost of Corporation Tax
  • Grants (there are plug-in grants to incentivise the purchase - not leasing - of ultra-low emissions cars, worth 35% of the purchase price up to £2500, or up to £6000 with qualifying vans.)
  • Vehicle Excise Duty (VED) - usually covered in the lease rate, but confirm this with the leasing provider

Once you can compare these figures across models, this affords you a much easier means by which to compare the total cost of running a vehicle.

How is it different from the headline leasing rate?

It’s easy to get sucked in by a lower headline leasing cost. One car is cheaper to lease - so choose that, right? Well, the simple answer is, if you’re only considering the headline leasing costs, you might end up paying substantially more in total.

It’s easy to be drawn to a differential in headline leasing costs. However, the recent changes to Benefit-In-Kind vehicle tax (or BIK tax) mean that it is more important than ever for businesses to consider using some sort of TCO, to properly work out which vehicle is going to make the best sense financially for your business - it could amount to a saving of thousands of pounds.

If you don’t know what BIK is, put simply it is a tax on employees who receive business perks, or benefits (such as a company car), on top of their salary. If you have a company car for private use, then, you will have to pay company car tax (a BIK contribution). Every different car has a BIK percentage banding, so failing to include a BIK calculation in your TCO calculation could run to thousands of pounds per vehicle per year that you haven’t accounted for.

As you can see, a TCO takes into account several cost factors for your car - whether you’re leasing for your personal transport, company car or even for a fleet of cars. To really make sure that you’re aware of the ultimate costs of your chosen vehicle, a TCO is the only way to go.

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