Choosing between leasing and buying a business car is one of the most consequential financial decisions a UK company or sole trader can make. The wrong choice can cost thousands in lost tax relief over the life of the vehicle.
This guide sets out the full 2026/27 tax position for each acquisition route — business contract hire (BCH), personal contract hire (PCH), hire purchase (HP), and outright purchase — so you can pick the option that delivers the best tax outcome for your business. Throughout the process, keeping accurate mileage records with Tripbook will strengthen whichever claim you make.
Buying Outright: Capital Allowances from April 2026
When a limited company or sole trader using the actual costs method buys a car, the purchase price is relieved through capital allowances over time. Cars are excluded from the Annual Investment Allowance (AIA) and full expensing, so the only available reliefs are Writing Down Allowances (WDAs) and, for zero-emission vehicles, the First Year Allowance (FYA).
From 1 April 2026, the capital allowance rates are:
| CO2 emissions | Pool | Annual rate |
|---|---|---|
| 0 g/km (fully electric) | First Year Allowance | 100 % in year one |
| 1–50 g/km | Main rate pool | 14 % reducing balance (down from 18 %) |
| Over 50 g/km | Special rate pool | 6 % reducing balance |
The 100 % FYA for zero-emission cars has been extended to April 2027, meaning a company that buys a £40,000 electric car can deduct the entire cost from taxable profits in the year of purchase. At 25 % corporation tax, that is a £10,000 tax saving in year one.
By contrast, a petrol car costing £30,000 and emitting 130 g/km enters the 6 % special rate pool. After five years of writing down allowances, only about £7,400 of the cost has been relieved — painfully slow. For a deeper look at how the pools work, see our full guide to capital allowances on cars UK.
Hire Purchase: Treated as a Purchase for Tax
HP (hire purchase) is the most common form of vehicle finance in the UK, and HMRC treats it as a purchase — not a lease. This distinction matters enormously.
From the moment the car is brought into the business, the full cash price qualifies for capital allowances, just as if the company had bought it outright. The monthly HP repayments themselves are not deductible as business expenses; instead, only the interest element of each payment is an allowable revenue deduction.
This means an electric car acquired on HP still qualifies for the 100 % FYA — you get the full deduction in year one even though you are paying the finance company over three or four years. For cash-flow-conscious businesses, HP on an EV is one of the most tax-efficient ways to acquire a vehicle.
Leasing: BCH, PCH, and the 15 % Restriction
Business contract hire (BCH) and personal contract hire (PCH) are operating leases. The business never owns the car; it pays monthly rentals and hands the vehicle back at the end of the agreement.
Lease rentals are deductible as a revenue expense — but there is a crucial restriction tied to CO2 emissions.
The 15 % Lease Rental Restriction
For any car emitting more than 50 g/km of CO2, 15 % of the lease rental is disallowed for tax purposes. Only 85 % of the payment is deductible. This applies to the finance/depreciation element of the rental; any separately identified maintenance element remains fully deductible regardless of emissions.
For cars emitting 50 g/km or less — including every fully electric vehicle — the full rental is deductible with no restriction at all.
Example: A sole trader leases a diesel estate at 140 g/km for £550 per month (£6,600 per year).
- Allowable deduction: 85 % × £6,600 = £5,610
- Disallowed: £990 per year
Over a typical four-year lease, that restriction costs £3,960 in lost deductions. Lease the same class of car as an EV variant and the full rental is deductible — no restriction.
VAT: Lease vs Purchase Rules
VAT treatment is a common blind spot, and the rules differ sharply between leasing and buying.
Buying (outright or HP): Input VAT on the purchase of a car can only be reclaimed if the vehicle is used exclusively for business with genuinely zero private use. Any private use — even a single commuting journey — blocks the entire VAT reclaim. In practice, most owner-managed businesses cannot reclaim purchase VAT.
Leasing (BCH/PCH): Where there is any element of private use, exactly 50 % of the VAT on lease rentals is reclaimable. This is a fixed 50 % block; the actual proportion of private use does not matter. The maintenance element, if separately invoiced, is 100 % VAT-reclaimable.
For the majority of businesses, the 50 % partial reclaim on leasing is more generous than the all-or-nothing rule on purchases. On a £550/month lease with £110 of VAT, reclaiming 50 % saves £660 per year — money that is simply lost if you buy the car and have any private use.
Worked Example: EV Lease vs EV Purchase
To show how these rules interact, consider a limited company acquiring a £42,000 electric car (0 g/km) in July 2026.
| Outright purchase | HP (48 months) | BCH lease (48 months, £520/month) | |
|---|---|---|---|
| Year 1 corporation tax saving | £10,500 (100 % FYA × 25 % CT) | £10,500 (same FYA) | £1,560 (£6,240 rental × 25 %) |
| Total deduction over 4 years | £42,000 (all in year 1) | £42,000 (all in year 1) | £24,960 (£6,240 × 4) |
| VAT reclaim (any private use) | £0 (blocked) | £0 (blocked) | £2,496 (50 % of VAT over 4 years) |
| Depreciation risk | Business bears it | Business bears it | None (hand back) |
| Residual value | Business keeps it | Business keeps it | None |
For a zero-emission car, buying or HP wins on upfront tax relief thanks to the 100 % FYA. Leasing wins on VAT recovery and removes depreciation risk entirely. The right answer depends on your cash position, appetite for residual-value risk, and whether you want the car on or off your balance sheet.
For a high-emission petrol or diesel car, leasing almost always produces a better tax outcome because the 6 % WDA on purchase is so slow that the annual lease deduction (even after the 15 % restriction) will outstrip the capital allowances for many years.
Mileage Records: Essential Whichever Route You Choose
Regardless of whether you lease or buy, HMRC expects you to demonstrate the proportion of business use. If a company car has mixed use, accurate mileage records support both the capital allowance claim (for purchased vehicles) and the deductibility of lease payments.
Tripbook records every business journey with GPS, calculates your business-use percentage automatically, and exports HMRC-ready reports. Whether you need to justify your FYA claim on a purchased EV or substantiate the business element of your lease rentals, a contemporaneous mileage log is the strongest evidence you can provide.
Download Tripbook from the App Store and start building the mileage records your business car claim needs.
Quick-Reference Summary
- Buy/HP an EV (0 g/km): 100 % FYA gives full deduction in year one — the strongest upfront tax saving available
- Buy/HP a petrol/diesel (over 50 g/km): 6 % special rate pool — very slow relief, generally unattractive
- Lease an EV: Full rental deductible, no 15 % restriction, 50 % VAT recovery on rentals
- Lease a petrol/diesel (over 50 g/km): 15 % of rental disallowed, but still faster relief than the 6 % WDA on purchase
- HP: Treated as a purchase — qualifies for capital allowances including 100 % FYA for EVs
- VAT: 50 % reclaimable on lease rentals; blocked entirely on purchase if any private use
The UK tax system strongly favours zero-emission vehicles whichever route you take. For most businesses, buying or HP-financing an EV under the 100 % FYA gives the best upfront relief, while leasing offers better VAT recovery and balance-sheet flexibility. Run the numbers for your specific situation — and make sure your mileage records are watertight from day one.
