In a nutshell: Leasing a car through your business can offer tax benefits, predictable monthly costs and access to newer vehicles. It’s important to choose the right type of lease for your needs (eg Business Contract Hire or Finance Lease) and understand the rules around VAT, corporation tax and benefits-in-kind so that you can make an informed decision that suits your business and budget.
In 2024, around 2.5 million vehicles were leased by UK businesses – an 8% increase on the previous year. So if you’re thinking about getting a company car, you’re far from alone.
Leasing allows you to drive a new vehicle without the upfront cost of buying, while spreading payments over a fixed term.
Many people decide to lease a car through their business rather than individually to take advantage of tax relief, reclaim VAT and improve cash flow.
But leasing a car isn’t suitable for everyone. While there are benefits, it comes with mileage restrictions, potential end-of-lease charges and tax implications to consider.
In this article, we’ll explain how business car leasing works, the tax and VAT rules, and how it compares to buying or financing a vehicle.
What is business car leasing?
Business car leasing, also known as Business Contract Hire (BCH), is essentially a long-term rental agreement where you pay a fixed monthly fee to use a car for a set period. At the end of the term, you simply hand the car back. There’s no option to buy it and you don’t have to worry about depreciation or selling it on.
The process of leasing a car is fairly simple. You choose a car that suits your business needs, agree on a mileage limit and contract length and pay a monthly fee. Most leases include maintenance and servicing, so you won’t face unexpected repair bills. And because you’re not tying up cash in a depreciating asset, leasing can be gentler on your cash flow than buying outright.
For businesses, tax benefits are one of the main appeals. Depending on the car’s CO2 emissions, you can usually deduct some or all of the lease payments from your taxable profits. You may also be able to reclaim some of the VAT.
Leasing is particularly popular for electric and low-emission cars. As well as having lower tax rates, they also align with many businesses' sustainability goals.
How does leasing compare to buying or financing a car?
Leasing isn’t the only way to get a company car. You could buy the car outright, take out a loan, or use a finance agreement. Each option has its pros and cons, so it’s worth weighing them up before you decide.
Leasing is all about flexibility and lower upfront costs. You don’t own the car, but you also don’t have to worry about its value dropping over time. Monthly payments can be lower than with a loan or Hire Purchase and you can upgrade to a new model every few years. The downside is that you don’t own the car and you’ll need to stick to a mileage limit to avoid extra charges.
Buying outright means you own the car from day one. There aren’t any monthly payments and you can sell the car whenever you like. But you’ll need to pay a lump sum upfront and the car’s value will depreciate over time. You may be able to claim capital allowances on the purchase price, but these are spread over several years.
Hire Purchase (HP) lets you spread the cost of buying a car over time. You pay a deposit, followed by monthly instalments and own the car at the end. Monthly payments are higher than with leasing, but you’ll eventually own the asset. You can also claim capital allowances, but again, these are spread over time.
Personal Contract Purchase (PCP) is another option. This is similar to leasing, but with the option to buy the car at the end of the term. Monthly payments are lower than with HP, but you’ll need to pay a large final ‘balloon’ payment if you want to keep the car.
For many businesses, leasing strikes the right balance between affordability and flexibility. It keeps monthly costs predictable, avoids the hassle of selling old cars and lets you drive newer, more efficient vehicles. But if you prefer to own your assets, buying or HP could be a better choice. For a detailed comparison, read our guide on leasing a vehicle vs financing for UK businesses.
Can I lease a car through my business?
In the UK, businesses account for around 75% of all car leases. And whether you’re a sole trader, partnership, or limited company, leasing a car through your business is usually straightforward – so long as you meet a few basic requirements.
Most leasing companies will work with VAT-registered businesses, but some also accept sole traders or partnerships. You’ll need to pass a credit check, which looks at your business’s financial health and trading history. And if you’re a newer business, you may need to provide additional documentation, like cash flow forecasts or a personal guarantee.
The type of business you run can impact your options. Limited companies and VAT-registered businesses tend to have the most choices, including access to tax-efficient leasing deals. Sole traders can also lease a car through their business, but the tax and VAT rules are slightly different. If you’re not VAT-registered, you won’t be able to reclaim VAT on lease payments, but you can still deduct the costs from your taxable profits.
How does leasing a car through your business vs personally compare?
Leasing a car through your business or personally can make a big difference to your tax bill, cash flow and how much you can claim back. The right choice depends on how you’ll use the car and what matters most to your finances.
Leasing a car personally
You pay the monthly lease fees yourself and can’t claim corporation tax relief or reclaim VAT
Instead of VAT reclaims, you can claim business mileage at HMRC’s approved rates (45p per mile for the first 10,000 miles)
There’s no benefits-in-kind tax to pay, since the car isn’t a company asset
You’re personally responsible for the lease payments and the car stays with you if you close or sell your business
You won’t benefit from the lower BiK rates or tax deductions available to businesses
Leasing a car through a sole trader or partnership business
Your business pays the monthly lease fees and you can usually deduct these from your taxable profits
If you’re VAT-registered, you can reclaim some of the VAT on lease payments (or more if the vehicle’s used solely for business)
You’ll need to pay benefits-in-kind (BiK) tax if you or your employees use the car for personal trips
The car must be used mainly for business to maximise tax benefits and the business is liable for the lease payments
Electric or low-emission cars offer the best tax advantages, with 100% of lease payments deductible for cars under 50g/km CO2
Leasing a car through a limited company
The process is similar to leasing through a business, but the tax and VAT rules are applied to the limited company’s finances
Your company can deduct lease payments from its taxable profits, reducing its corporation tax bill
VAT reclaim rules remain the same
BiK tax still applies if the car is available for personal use, but the company can offset some of the cost through tax relief
Limited companies often find it easier to access leasing deals due to their established financial credibility and trading history
If the company folds, your liability’s limited since the car isn’t a personal asset
For more information, read our guide to purchasing a car through a limited company.
How to lease a car through a business
Getting a business car lease is relatively straightforward. Here’s how the process usually works:
Check your eligibility: Most leasing companies will require your business to be VAT-registered, but some will work with sole traders. You’ll also need to pass a credit check, so it’s worth reviewing your business credit score beforehand.
Choose your car: Think about what you need the car for. If you’re doing lots of miles, a diesel or hybrid might be a more cost-effective choice. For shorter trips or city driving, an electric car could save you money on fuel and tax.
Set your budget and terms: Decide how much your business can afford to pay each month and how long you want the lease to last (most contracts run for two to four years). You’ll also need to set a mileage limit – be careful here, as going over the limit can result in penalty charges.
Apply for the lease: You’ll need to provide some details about your business, including your trading history and financials. If you’re a newer business, you may need to provide additional documentation, like cash flow forecasts.
Sign the agreement and take delivery: Once you’re approved, you’ll sign the contract and arrange a delivery date. The car will usually be delivered to your business address, ready to drive.
Keep on top of payments and maintenance: Make sure you stick to the payment schedule and keep the car in good condition. Most leases include maintenance, but you’ll still need to arrange servicing and MOTs if they’re not covered.
Six things to consider when leasing a car through your business
Leasing can be a great option, but it’s not right for every business. Here are the key things to think about before you commit:
Emissions: The less CO2 your car produces, the better your tax benefits will be. Electric cars have the lowest company car tax (BiK) rates – just 3% in 2025/26, rising 1% per year until 2027 – and let you deduct the full cost of the lease from your taxable profits. Petrol and diesel cars have higher BiK rates and only let you deduct 85% of the lease cost.
Mileage limits: Going over your agreed mileage can be expensive, so choose a limit that matches your business needs. If you’re not sure, it’s safer to guess higher rather than lower.
VAT reclaim: If you use the car for both work and personal trips, you can only claim back some of the VAT. If it’s only used for work, you might be able to claim more. Keep records to back up your claim.
Benefits-in-kind tax: If you or your employees use the car for personal trips, you’ll have to pay BiK tax. The amount depends on the car’s price and CO2 emissions.
Insurance and maintenance: Most leases cover maintenance, but you’ll need to arrange your own insurance. Make sure it includes business use and think about gap insurance (which covers the difference between your car’s value when you bought it and what an insurance company would pay you) to cover theft or write-offs.
End-of-lease charges: At the end of the lease, the car will be checked for damage. You’ll pay for anything worse than normal wear and tear, so try your best to keep it in good condition.
How does VAT and tax work for businesses leasing a car?
One of the biggest advantages of leasing a car through your business is the tax relief. But the rules can be complex, so it’s important to get them right.
VAT
You can reclaim a portion of the VAT on your lease payments, depending on how the car is used.
If the car’s used for both business and personal trips, you can reclaim 50% of the VAT.
If it’s used exclusively for business, you may be able to reclaim 100%. Maintenance costs are also eligible for 100% VAT reclaim.
Corporation tax
The amount you can deduct from your corporation tax depends on the car’s CO2 emissions.
For cars with emissions of 50g/km or less (such as electric vehicles), you can deduct 100% of the lease payments
For cars with higher emissions, only 85% of the lease payments are deductible
Benefits-in-Kind (BiK)
If the car’s available for personal use, you or your employees will need to pay BiK tax. The exact rate will depend on the car’s list price and CO2 emissions.
Electric cars have a BiK rate of just 3%, making them very tax-efficient
Petrol and diesel cars can attract BiK rates as high as 37%
Your business will need to pay Class 1A National Insurance contributions (NICs) at 13.8% on the BiK value.
Is leasing right for your business?
Leasing a car through your business can offer valuable financial benefits, particularly if you choose a low-emission vehicle. It’s a flexible, tax-efficient way to keep your business up to date without tying up cash in depreciating assets.
But leasing isn’t your only option. If you prefer to own your vehicles, buying or financing a car might be a better choice.
If you’re not sure which route to take, it’s worth speaking to an accountant or tax advisor. They can help you compare the numbers and choose the right option for your business.
Wrapping up
Leasing a car through your business could improve your cash flow, reduce your tax bill, and keep your operations running smoothly. It can enable you to drive newer, more efficient vehicles without the upfront cost of buying. Electric and low-emission cars offer even bigger tax savings.
But like any financial decision, leasing comes with its own considerations. For example, it could affect your VAT reclaims, trigger Benefit-in-Kind tax, and cap your annual mileage.
If you’re considering leasing a car through your business, you don’t have to navigate it alone. Tide’s business vehicle finance options make it easy to explore leasing and other funding solutions. So whether you’re a sole trader looking for your first company car or a limited company director upgrading your fleet, Tide could help you find the right finance to keep your business moving forward.
FAQs
Can I lease a car with limited business credit history?
Yes, but you may need to provide additional documentation, like cash flow forecasts or a personal guarantee. Some lenders specialise in working with newer businesses, so it’s worth shopping around for a good deal.
How does leasing affect my cash flow and seasonal budgeting?
Leasing spreads the cost of a car into fixed monthly payments, making it easier to manage cash flow. But you’ll need to make sure you can cover these payments even during slower trading periods.
How can I use leasing to maximise tax benefits for my limited company?
Consider opting for a low-emission or electric vehicle to deduct 100% of the lease payments from your taxable profits and benefit from lower benefits-in-kind rates. Keep accurate records of business mileage to maximise VAT reclaims.
What happens if I exceed the mileage limit?
Going over your mileage limit will likely result in extra charges per mile, which can become expensive. It’s usually more cost-effective to set a realistic mileage limit from the start rather than paying excess fees later.
Can I lease a van through my business?
Yes and vans often come with more favourable tax treatment. You can typically deduct 100% of the lease payments from your taxable profits, regardless of emissions, making them a tax-efficient choice for many businesses.
Do I need to pay a deposit when leasing a car through my business?
Most business leases require an initial payment, usually equivalent to three, six, or nine months’ payments upfront. The larger the initial payment, the lower your monthly instalments will be.
Can I include maintenance and servicing in my lease agreement?
Yes, many business leases include maintenance packages that cover servicing, tyres and breakdown assistance. This can help you avoid unexpected repair costs and keep your vehicles in good condition.
What happens at the end of the lease term?
At the end of the lease, you simply return the car to the leasing company. The vehicle will be inspected for any damage beyond normal wear and tear and you may be charged for excessive damage or mileage.
Can I lease multiple cars for my business?
Yes, many leasing providers offer fleet solutions that allow you to lease multiple vehicles under a single agreement. This can simplify administration and potentially secure you better rates.
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