Should you buy or lease a company car?

Deciding whether to buy or lease a company car is not just a practical choice; it is also a tax decision. The option you choose can affect your corporation tax bill, cash flow, and the total cost of running the vehicle through your business.

This guide explains the key differences between buying and leasing a company car, how the tax treatment works, and what business owners should consider before committing.

Buying a Company Car Through Your Business

When a company buys a car, either outright or using finance, the vehicle becomes a business asset. The way tax relief is claimed depends on whether the car is new or used, its CO2 emissions, and how it is financed.

Tax Treatment When Buying a Company Car

Brand new electric cars: If your company purchases a brand new, fully electric car, the full cost of the car can be deducted from taxable profits in the first year. This is known as a First Year Allowance. For many businesses, this makes buying a new electric car very tax-efficient as you do not have to spread the relief over several years.

Example: If your company buys a new electric car for £40,000, the company can deduct the full £40,000 from its profits in the year of purchase. At a corporation tax rate of 25%, this could reduce the tax bill by £10,000 in that year.

Used electric cars: Used electric cars do not qualify for the 100% allowance. Instead, tax relief is spread over several years, starting at 18% per year, and reducing each year thereafter. Business owners regularly overlook this difference when comparing new and used electric vehicles, as it is often assumed that all electric cars receive the same tax treatment.

Example: A used electric car that costs £30,000 may only give a tax relief of £5,400 in the first year, rather than the full amount.

Petrol and diesel cars: For petrol and diesel cars, tax relief depends on CO2 emissions:

• Lower-emission cars may qualify for 18% annual allowances.
• Higher-emission cars may be restricted to 6% per year.

This means that it can take many years to fully claim tax relief, making these vehicles less tax-efficient when bought through a company.

Buying With Finance: HP and PCP

Most businesses do not buy cars outright in cash. Two common finance options are Hire Purchase and Personal Contract Purchase:

Hire Purchase (HP): With HP, the company is treated as owning the car from the start. This means capital allowances can usually be claimed, including the 100% relief for new electric cars, and interest payments are typically allowable as a business expense.

Example: A new electric car bought on HP for £45,000 can still qualify for 100% tax relief in year one, even though the business pays for it monthly.

Personal Contract Purchase (PCP): PCP works slightly differently. While monthly payments are lower, ownership may not transfer until the final payment. The final balloon payment and ownership structure affect how capital allowances apply, so this option needs careful review before proceeding.

Leasing a Company Car Through Your Business

Leasing, often referred to as contract hire, means the business never owns the vehicle. Instead, it pays a fixed monthly amount to use the car for an agreed period.

Tax Treatment When Leasing a Company Car

Lease payments are usually treated as an ongoing business expense, which means that tax relief is spread across the life of the lease rather than claimed upfront.

For VAT-registered businesses, 50% of the VAT can usually be reclaimed on the lease payments, and 100% of VAT can usually be reclaimed on maintenance costs.

For many businesses, this provides predictable costs and steady tax relief each month. However, it does mean there is no large tax deduction in year one, even for electric vehicles.

There may also be restrictions on how much of the lease cost is tax-deductible for higher-emission cars.

Example: If your company leases a car for £500 per month plus VAT, the annual cost to your business is £6,000 plus VAT. The business can then usually reclaim £600 of the overall £1,200 VAT, and the remaining lease cost is deducted from profits over the year.

Practical Considerations With Leasing

There are some benefits to leasing a vehicle, as leasing arrangements often include servicing and maintenance, road tax, and breakdown cover. However, mileage limits will apply, and the charges for excess milage can be significant.

Benefit in Kind and Personal Use

If a company car is available for personal use by a director or employee, a Benefit in Kind (BiK) charge may apply. This is taxed personally and also attracts employer National Insurance.

Electric cars currently have much lower BiK rates than petrol or diesel cars, which is why they remain a popular choice for company vehicles. However, these rates are set to increase gradually over the next few tax years.

More significantly, there are planned changes from the 2028/29 tax year, which will affect the BiK treatment of electric company cars. While electric vehicles are still expected to remain more tax-efficient than petrol or diesel alternatives, the personal tax cost for drivers is likely to rise.

This is particularly relevant when entering into multi-year agreements, such as a three-year lease. The BiK rate in the final year of the lease may be higher than when the vehicle was first taken on, which can impact personal tax planning for directors and employees.

For this reason, it is important to consider not just today’s BiK rate, but how future changes could affect the overall cost of having a company car over the full term of ownership or lease.

Choosing the Right Option for Your Business

There is no single correct answer when deciding whether to buy or lease a company car. The most tax-efficient option depends on the type of car, how it is financed, how it is used, and the wider financial position of the business.

The examples in this article provide general guidance only. Specific advice will depend on your circumstances, including future plans, profitability, and personal tax exposure.

This is where GLX can help you with tailored advice, ensuring the decision supports both your business and personal finances.

For further advice on whether you should buy or lease a company car, contact our team today.