In a nutshell: Leasing a vehicle keeps your cash flow steady and lets you drive newer, greener cars without the hassle of selling them later. Financing or buying gives you ownership and potential tax benefits, but comes with higher costs and depreciation. The right option for you will depend on your business’s financial goals and how you plan to use the vehicle.
Business Contract Hire (BCH) cars now make up 76% of the UK’s leased car fleet – up from 72% just a year ago. And with two-thirds of leased cars now plug-in hybrids or fully electric, it’s clear that more businesses are turning to leasing for flexibility, tax efficiency and access to greener vehicles.
But leasing isn’t the only way to get a company car. Financing options like Hire Purchase (HP) or Personal Contract Purchase (PCP) let you spread the cost while working towards ownership. And if you’ve got the cash, buying outright avoids monthly payments altogether.
Choosing between leasing vs financing will affect your cash flow, tax bill and even your balance sheet. Leasing keeps costs predictable and lets you upgrade regularly, but you’ll never own the car. Financing or buying means the vehicle is yours, but you’ll face depreciation and higher upfront costs.
In this article, we’ll explain how each option works, how they differ and how to decide which is best for your business based on your priorities and financial situation.
What is vehicle leasing?
Leasing is essentially a long-term rental. You pay a fixed monthly fee to use a vehicle for a set period (usually two to four years) then hand it back at the end. There’s no option to own the car or van unless you choose a lease purchase agreement, which includes a final balloon payment.
Most businesses opt for Business Contract Hire (BCH), where you pay an initial deposit (often equivalent to 3-6 monthly payments), followed by fixed monthly instalments. The lease agreement will include a mileage limit and you’ll need to return the vehicle in good condition to avoid extra charges. Many contracts also bundle in maintenance, road tax and breakdown cover, so you don’t have to worry about unexpected costs.
Leasing is popular because it’s simple. You don’t have to worry about the vehicle losing value and you can upgrade to a newer model every few years. It’s also easier to budget for, since your payments will stay the same throughout the contract.
If you’re considering leasing a car for your business, it’s worth exploring how it could fit into your overall fleet strategy – particularly with the growing range of electric and hybrid options available. For a deeper look at how this works in practice, read our guide on leasing a car through a business.
What is vehicle financing?
Financing a vehicle involves spreading the cost of buying it over time. Unlike leasing, you’ll own the vehicle at the end of the agreement (or have the option to). There are two common types of financing:
Hire Purchase (HP): You pay an up-front deposit, then fixed monthly instalments over two to five years. The vehicle’s yours once you’ve made all the payments. HP is straightforward, but you’ll pay more each month than you would for a lease and you’ll be responsible for selling the vehicle when you’re done with it. Learn more about Hire Purchase in our guide.
Personal Contract Purchase (PCP): Your monthly payments are lower, but at the end of the contract, you’ve got three choices: pay a lump sum (the ‘balloon payment’) to own the vehicle, trade it in for a new one, or simply hand it back. PCP is flexible, but the balloon payment can be costly and you’ll need to keep within a mileage limit to avoid penalties.
Financing can be a good option if you want to own the car eventually. But you’ll need to factor in depreciation – the average car loses 60% of its value in the first three years. You’ll also be responsible for maintenance, insurance and road tax.
The difference between leasing and financing a car or van
Leasing is all about convenience. You get a new car every few years, with minimal hassle and no surprises. But you’re paying for that convenience – you’ll never own the car and if you go over your mileage limit or return it damaged, you’ll face extra charges.
Financing gives you more control. You can modify the car, drive as many miles as you like (with HP) and eventually own an asset. But you’ll pay more each month and you’ll need to budget for maintenance, insurance and the car’s falling value.
| Leasing (BCH) | Financing (HP/PCP) |
|---|
| | Yes (after final payment) |
| Low (3-6 months’ payments) | |
| | |
| Yes (eg 10,000 miles/year) | |
| | |
| | |
| Off-balance-sheet (operating lease) | On-balance-sheet (asset and liability) |
| | More flexible – own it, trade it in, or return it |
| | |
What are the pros and cons of leasing a vehicle?
Leasing could be a good fit if you prioritise cash flow and flexibility. But it can be more expensive in the long run and you’ll need to stick to the terms of your contract to avoid penalties.
Pros
Predictable costs: Fixed monthly payments make budgeting easier.
No depreciation: The leasing company takes the hit if the car loses value.
Access to newer cars: Drive the latest models with the newest tech and lowest emissions.
Tax benefits: You can deduct 85% of lease payments (for cars over 50g/km CO2) from your taxable profits. And if you’re VAT-registered, you can reclaim 50% of the VAT on the monthly payments.
Maintenance included: Around 71% of new BCH car contracts (67% of new van contracts) now include servicing, tyres and breakdown cover.
Cons
No ownership: You’re effectively renting the car long-term
Mileage restrictions: Go over your limit and you’ll pay extra (usually 3-10p per mile)
End-of-lease charges: Damage or excess wear and tear can lead to costly bills
Long-term cost: You’ll often pay more over time than you would if you bought the car outright
What are the pros and cons of financing a vehicle?
Financing could be a better option if you want to own the car or van and can afford the higher payments. But depreciation is something to consider (particularly for non-electric vehicles, which qualify for lower capital allowances).
Pros
Ownership: The car’s yours at the end of the agreement (or you can choose to walk away with PCP)
No mileage limits: With Hire Purchase, you can drive as much as you like
Tax relief: If you buy the car through your business, you can claim capital allowances – up to 100% of the cost in the first year for electric cars
Asset on your balance sheet: Owning the car can improve your business’s net worth and borrowing power
Cons
Higher monthly payments: Financing usually costs more each month than leasing
Depreciation risk: Cars lose value fast, so a new car could be worth 60% less after just three years
Responsibility for costs: You’ll need to budget for maintenance, insurance and road tax
Harder to upgrade: Selling the car when you’re done with it can be a hassle
How does leasing vs financing impact tax?
If you’re looking for the most efficient tax option, this will depend on the vehicle. For electric vehicles, financing is often most tax-efficient because of the 100% first-year capital allowance. For petrol or diesel cars, leasing is usually more tax-efficient, as you can deduct most of the cost as a business expense.
Leasing
Corporation tax: You can deduct 85% of your lease payments (for cars over 50g/km CO2) from your taxable profits. For electric cars, it’s 100%.
VAT: You can reclaim 50% of the VAT on your monthly payments. If your lease includes maintenance, you can reclaim 100% of the VAT on that part.
Benefits-in-kind (BiK): If you or your employees use the vehicle personally, you’ll pay BiK tax. The rate depends on the car’s CO2 emissions (it’s just 3% for electric cars in 2025/26 – though this will rise 1% per year until 2027).
Financing
Capital allowances: You can claim tax relief on the car’s cost over time. For electric cars, you can deduct the full cost in the first year (100% first-year allowance). For petrol or diesel cars, the rate depends on CO2 emissions:
Main rate (18% per year): For cars with CO2 emissions of 50g/km or less (including electric vehicles).
Special rate (6% per year): For cars with CO2 emissions over 50g/km.
VAT: You can’t reclaim VAT on the purchase price (unless the car’s used for taxi or driving instruction). But you can reclaim VAT on running costs like servicing and repairs.
For the latest rules, read GOV.UK’s capital allowances guide and HMRC’s VAT motoring expenses guide.
How does leasing vs financing impact your balance sheet and cash flow?
The way you fund your vehicle will affect both your financial statements and your day-to-day budgeting.
Leasing
Off-balance-sheet: Operating leases (like BCH) don’t usually appear as assets or liabilities on your financial statements*, which can make your business look more financially stable
Cash flow: Lower monthly payments can free up cash for other expenses
Financing
On-balance-sheet: The car’s recorded as an asset and the loan as a liability. This affects your gearing ratio, which lenders look at when assessing your creditworthiness.
Cash flow: Higher monthly payments can put pressure on your budget.
*Note that from 2026, new accounting rules (FRS 102) will bring more leases onto the balance sheet. If you’re concerned about how this might affect your finances, it’s worth speaking to an accountant.
Leasing vs financing an electric vehicle
Electric cars can make financial sense, whether you lease or finance. But leasing lets you upgrade to the latest model every few years, while financing gives you an asset that could hold its value better than a petrol or diesel car.
Around 70% of BCH cars are now battery electric (BEV) or plug-in hybrid (PHEV) and that number’s growing fast. Here’s what you need to know:
Leasing an electric vehicle
Lower BiK rates: Just 3% in 2025/26, rising 1% per year until 2027
No fuel costs: Charge at work or home and you could cut your running costs by 80% compared to petrol or diesel
Used EV leasing: The market for second-hand electric leases grew by 174% year-on-year
Financing an electric vehicle
100% first-year capital allowance: Deduct the full cost of the car from your taxable profits in year one
VAT: Same rules as petrol/diesel – you can’t reclaim VAT on the purchase price, but you can on running costs
How to decide between leasing or financing a vehicle
The choice between leasing or financing a vehicle varies for every business. The right option for you will depend on your cash flow, how long you plan to keep the car and whether you prioritise flexibility or ownership.
When to consider leasing
You want low, fixed monthly payments and no depreciation risks
You like the idea of driving a new car every few years
You want to avoid maintenance hassles (most leases include servicing)
You’re not fussed about ownership and prefer flexibility
When to consider financing
You want to own the car eventually
You drive high mileages (HP has no mileage limits)
You’re buying an electric car and want to claim the 100% first-year capital allowance
Of course, you don’t have to take on debt. If you’ve got the cash upfront, want to avoid monthly payments and plan to keep the car for at least five years, it could be more cost-effective to buy the vehicle outright.
If you’re a sole trader or partnership, buying outright means you can claim capital allowances or use simplified expenses for business mileage. If you operate a limited business, explore the tax benefits and process of purchasing a car through your company.
Wrapping up
Choosing between leasing and financing a vehicle depends on your business’s priorities – whether that’s cash flow, tax efficiency, or long-term ownership. Both options have their advantages, but the right choice comes down to your financial goals and how you plan to use the vehicle.
Here’s what to bear in mind:
Leasing offers low, fixed monthly payments and tax deductions (85% for most cars, 100% for EVs)
Financing gives you ownership and capital allowances (100% for EVs), but with higher monthly costs
Electric vehicles provide the highest tax savings, with 3% BiK rates and 100% first-year allowances
Leasing is usually off-balance-sheet, while financing adds an asset and liability to your books
Leasing provides flexibility to upgrade, while financing or buying means long-term ownership
Want to explore the best way to fund your next company vehicle? Tide’s vehicle finance options make it easy to compare leasing, Hire Purchase, and other types of funding. With support tailored to your business – whether you’re scaling up, going electric, or just aiming to keep costs predictable – you can find a solution that aligns with your cash flow and long-term plans.
FAQs
What’s the cheapest way to get a company vehicle?
Leasing usually works out cheaper in the short term, since monthly payments are lower than financing. But if you keep a car for five years or more, buying outright is often the most cost-effective option.
Can I lease a car if I have bad credit?
It’s tougher, but not impossible. Some lenders specialise in leasing for businesses with poor credit, but you’ll likely pay higher interest rates. Building your credit score with Tide’s Credit Score Insights could improve your chances.
How do lease payments affect my corporation tax?
You can deduct 85% of lease payments (for cars over 50g/km CO2) from your taxable profits. For electric cars, it’s 100%.
What happens if I go over the mileage limit on a lease?
You’ll pay an excess mileage charge – usually 3-10p per mile. Check the limit before signing and be realistic about your annual mileage.
Can I claim VAT back on a leased or financed car?
With leasing, you can reclaim 50% of the VAT on monthly payments. With financing, you can’t reclaim VAT on the purchase price, but you can on running costs like servicing.
Is it better to lease or finance an electric vehicle?
Financing lets you claim the 100% first-year capital allowance, which can be a big tax saving. But leasing gives you flexibility to upgrade as EV tech improves.
What are the risks of financing a car that depreciates quickly?
If the car loses value faster than expected, you could end up owing more than it’s worth, particularly with PCP. Check the car’s projected depreciation before choosing.
Can I end a lease early if my business needs change?
Yes, but it can be expensive. You’ll typically pay 50% of the remaining rentals as an early termination fee. So check the small print before signing.
What’s the difference between Hire Purchase (HP) and Personal Contract Purchase (PCP)?
HP lets you own the car at the end of the agreement, with no mileage limits. PCP has lower monthly payments but a large final balloon payment if you want to own the car.
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