If you’re looking to invest in new equipment or machinery, you could lease the asset rather than buy it upfront which can be costly. But how do you know which type of leasing arrangement aligns with your goals, cash flow, and long-term plans?
With the UK’s £17 billion finance lease market expected to grow around 6% between 2025 and 2026, and major accounting changes coming in 2026 (more details below), choosing the right lease could help protect your business’s future.
Whether you’re a start up looking to conserve cash, a growing business needing to invest in the latest technology, or an established company planning long-term equipment needs, the right lease could save you money, simplify your finances, and even improve your balance sheet.
In this article, we’ll break down everything you need to know, from how each lease works to the upcoming accounting changes and tax implications. By the end, you’ll have the clarity and confidence to choose the right option for your business.
What is an operating lease?
An operating lease is like renting. You pay to use an asset (eg a van, a computer, or office furniture) for a set period. Then at the end of the lease, you return it or upgrade to something newer. You never own the asset.
The benefit of an operating lease is that you can use the asset without any long-term commitments, since the lessor (the company you’re leasing from) will usually handle the maintenance. Plus, operating leases often come with lower monthly payments compared to finance leases.
As of 2025, operating leases don’t appear on your balance sheet, instead appearing as a simple expense. This can make your business appear less leveraged than it really is. But this is changing. From January 2026, new lease accounting rules (the updated FRS 102 standard) will require most operating leases to show up as both an asset and a liability on your balance sheet. This could affect how lenders and investors view your business, so it’s worth planning ahead.
Operating lease example
A delivery business leases a van for three years, with maintenance included. At the end of the term, they either return the van or upgrade to the latest model. This means they avoid the hassle of selling an old vehicle, benefit from predictable monthly costs, and always have access to reliable, up-to-date transport – without the long-term commitment of ownership.
What is a finance lease?
A finance lease is like a loan. You pay to use the asset over its useful life and, at the end of the lease, you (usually) have the option to buy it for a small fee. Unlike an operating lease, a finance lease will appear on your balance sheet both as an asset and a liability.
If you want to eventually own the asset, a finance lease is one way to spread the cost over time. You also claim tax benefits, like claiming capital allowances and deducting the interest portion of your payments.
Finance leases usually come with higher monthly payments than operating leases. And because you’re responsible for maintenance, you’ll need to factor those costs into your budget.
Example of a finance lease
A manufacturer leases a £50,000 machine. They make monthly payments during the five year lease term. At the end of the term, they pay a nominal £1 fee to own the machine outright. They’ve spread the cost, claimed tax relief, and now own a valuable asset.
Key differences between operating lease vs. finance leases
| Operating lease | Finance lease |
|---|
| No (you return the asset at the end) | Yes (you can usually buy the asset for a small fee) |
| | |
| Usually included by the lessor | |
| | |
| Payments are tax-deductible as expenses | Claim capital allowances and interest deductions |
| Easy to upgrade or return the asset | |
| Short-term use, tech, or vehicles | Long-term assets you want to own |
The key differences of a finance vs. operating lease usually come down to:
Ownership: Do you want to own the asset eventually or return it?
Cost: Are you more interested in lower monthly payments or long-term savings?
Flexibility: Do you need the asset for short or long-term use?
Typically, if you want flexibility and lower costs, an operating lease is a great fit. But if you’re after ownership and tax benefits, a finance lease could save you money in the long run.
What are the accounting and tax implications?
As well as impacting your monthly payments, leases also affect your balance sheet and tax bill – particularly with new rules coming in 2026.
How leases are treated under UK accounting standards
Right now, operating leases are treated like rental expenses – they don’t appear on your balance sheet. But that’s about to change.
From 1 January 2026, new UK accounting rules (amendments to FRS 102) will require most operating leases to be ‘capitalised’. This means you’ll need to recognise a ‘right-of-use’ asset (the value of the leased item you have the right to use) and a lease liability on your balance sheet. It’s a big change that could impact how lenders, investors, and even customers may assess your business’s financial health.
The result of this change will mean:
Your balance sheet will show higher assets and liabilities, which could affect financial ratios like debt-to-equity
If you have financial covenants (like loan agreements tied to your balance sheet), this change could trigger a breach if you’re not prepared
In contrast, finance leases have always been capitalised. So if you’re using a finance lease, you won’t see a change.
Tax implications of operating and finance leases
When it comes to tax, the type of lease you choose will impact the deductions and relief you can claim. Put simply, finance leases generally offer more tax advantages, but operating leases are simpler to manage.
Operating leases
Payments are fully tax-deductible as operating expenses
You can usually reclaim 50% of the VAT on cars and 100% on some other assets like equipment or vans
Finance leases
You can claim capital allowances on the asset, which reduces your taxable profits
The interest portion of your payments is also tax-deductible
VAT reclaim rules are the same as operating leases
If you’re using operating leases now, talk to your accountant about how the 2026 changes could affect your business. And if you’re considering a finance lease, make sure you’re claiming all the tax relief you’re entitled to.
Is an operating or finance lease more suitable for your business?
The right lease for your business depends on your goals, cash flow, and how long you need the asset.
Consider an operating lease if you
Want lower monthly payments and flexibility to upgrade
Don’t want the hassle of ownership or maintenance
Need the asset for a short-term project or plan to upgrade regularly
Consider a finance lease if you
Want to own the asset at the end of the lease term
Are more interested in long-term cost savings and tax benefits
Need an asset that won’t become obsolete quickly (eg machinery, property)
Can handle higher monthly payments and maintenance costs
Here are some examples:
A tech start up leasing laptops and servers on an operating lease to keep up with regular tech improvements
An independent retail business using an operating lease for point-of-sale systems to avoid maintenance costs
A small manufacturer leasing machinery on a finance lease to eventually own the equipment and claim tax benefits
A legal firm leasing office printers on an operating lease to ensure they always have the latest models
A solar panel installer using a finance lease for vans and tools to build long-term assets for the business
If you’re still unsure, use Tide’s business loan calculator to compare the costs of leasing options you find.
Wrapping up
Operating leases and finance leases both offer ways to access essential assets without putting up large upfront costs. And depending on your needs, one is likely to be more suitable than the other.
Operating leases can be good for short-term use, flexibility, and lower monthly costs
Finance leases can be good for long-term use, ownership, and tax benefits
When choosing between the two, ask yourself:
How long do I need the asset? If short-term, consider an operating lease. If long-term, consider a finance lease
Do I want to own it eventually? If yes, a finance lease could be your best bet
What’s my cash flow like? If you need to keep costs low, an operating lease might be the way to go
Am I prepared for the 2026 accounting changes? If not, now’s the time to talk to your accountant
And remember, leasing isn’t your only option. Other types of finance could fulfil your needs, such as business loans or asset finance.
FAQs
Which type of lease is most common in the UK?
Both operating leases and finance leases are widely used in the UK. The financial leasing market is currently worth £17 billion and is expected to grow around 6% between 2025 and 2026.
Can I lease any type of asset?
All sorts of assets can be leased, from vehicles and machinery to IT equipment and office furniture. Some assets, like company cars, have specific tax rules, so always check with your accountant.
Is leasing better than buying outright?
Leasing helps you retain more of your cash flow and means you don’t have to pay large upfront costs. But buying could be cheaper in the long run if you can afford it. For assets that depreciate quickly (like technology or vehicles), leasing is often the more cost-effective choice because you can upgrade to newer models without worrying about its resale value or how to dispose of it.
Can I switch from an operating to a finance lease mid-term?
Possibly, but you’ll need your lender’s approval. The downside of switching is it may involve additional fees or accounting adjustments. It’s usually best to choose the right lease from the start since switching mid-term can be complex and expensive.
How will the 2026 accounting changes affect my operating leases?
From 1 January 2026, most operating leases will need to be capitalised on your balance sheet. This means you’ll recognise a ‘right-of-use’ asset and a lease liability, which could affect your financial ratios, which in turn could impact your ability to secure loans or investment.
Will the 2026 changes affect my tax bill?
The 2026 changes shouldn’t affect the tax treatment of lease payments, but your balance sheet will look different and this could impact how lenders and investors view your business.
Are there any hidden costs of leasing?
To avoid potentially hidden leasing costs, look out for early termination fees, excess mileage charges, damage or wear-and-tear fees (especially with vehicles) and maintenance costs if they’re not included in your contract. Also be aware of potential administration fees, initial down payments, and insurance requirements.
What happens if I default on a lease payment?
If you default on a lease payment, the lender could repossess the asset or charge late fees. Defaulting can also harm your credit score which could make it harder to secure future funding.
Can I lease used or second-hand equipment?
You can often lease used or second-hand equipment but your options may be more limited compared to new equipment.
How do leases work for commercial property?
Most commercial property leases are operating leases, with terms ranging from 3 to 25 years. The 2026 accounting changes will have a big impact here, as nearly all UK businesses lease their premises – your lease liabilities will appear on your balance sheet, potentially affecting your financial health and borrowing capacity.
Can freelancers or sole traders use leasing?
Yes, both freelancers and sole traders can use leasing if they wish. Leasing can be a great way to access equipment like laptops or cameras without large upfront costs. Operating leases are especially popular for short-term needs.
Is leasing available for start ups?
Yes, leasing is available for start ups. But you may need to provide a personal guarantee or a larger deposit. Some lessors offer start up-friendly terms, so ask about flexibility and early upgrade options.
Photo by Spencer Davis on Unsplash
