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As accountants, clients often ask us – What works better: leasing a car in my name or doing it through my limited company? It is important to understand that different factors need to be considered, as the rules differ for a limited company and a sole trader. Keep reading to explore the subject in detail.
Leasing a Car for Your Business: Is it a Good Decision?
Decisions related to leasing a car for your business should not depend solely on taxation. Instead, they should align with your overall business strategy. The decision to lease a new car should be based on whether it makes business sense for your organisation.
Take the case of an architect who owns an old car. At a personal level, all the repair costs may be claimable, and the applicable tax is comparatively lower due to the vehicle’s age. However, from a business perspective, you may want to change the car and opt for a new one, because as a professional, meeting clients in an old, rickety vehicle may not create the right impression.
Leasing a car can be a good decision, but remember: if you’re mostly working from home, you may incur a lot of unnecessary expenses.
Therefore, leasing a new car should be a business decision, and it should be the first decision. The next should be about the financing options for the car.
What Are the Ways a Business Can Finance a Car?
Let us first cover the different car financing options before understanding the tax implications. There are several ways to finance a car—these include a loan, renting, hire purchase (HP), leasing, or PCP.
- A Loan
When you take a loan to finance a new car, the vehicle is yours from day one. Each month, you are required to pay interest along with a portion of the principal amount. Over the loan term, you’ll gradually repay both the interest and the principal. Once the loan is fully paid off, the vehicle is completely yours.
- Hire Purchase (HP)
This method also involves borrowing money, but it works differently from a standard loan. In this case, you’re effectively renting the vehicle throughout the loan term. Only after all payments are made does the car become legally yours, giving you full ownership and turning the vehicle into an asset.
If you opt for HP through your limited company, you are eligible for tax relief only in the tax year in which the HP agreement began.
- Leasing a Car
With a lease—whether taken out personally or through your business—you never own the vehicle. You simply rent it for a set term, usually between 3 and 5 years. In a business lease, you are typically responsible for repairs, maintenance, servicing, and any applicable taxes during the lease period.
- PCP (Personal Contract Plan)
PCP is similar to leasing but with one key difference. At the end of the agreement, you have the choice to buy the vehicle by making a final “balloon” payment—this amount is usually quite substantial. If you choose not to pay, the vehicle will be returned to the finance provider.
What Are the Benefits of Leasing a New Car Through Your Business?
- No Personal Liability
One of the biggest benefits is that the lease is with the limited company, not you personally. This means that if things go south and the business begins to wind up, you have no personal liability to repay the lease.
- Tax-Deductible Payments
All lease payments made by the business are fully tax-deductible. It’s a straightforward process—payments and documentation are handled by the company, and the new car is for you to drive. VAT can also be claimed by the business on lease payments, depending on how the vehicle is used. If there’s limited private use, the company can claim 50% of the VAT. In cases where the vehicle is used entirely for business—such as for taxi drivers or driving instructors—100% of the VAT can be claimed.
- Group Discounts
If the business leases multiple cars, lenders may offer group discounts—something not available to individuals or private leases.
- Other Advantages
Money spent on maintenance and repairs is also claimable, which adds to the financial benefits of leasing through your business.
That said, there are some downsides. If you’d like to keep or own the car at the end of the lease agreement, that won’t be possible under a standard lease.
What Are the Benefits of Leasing a New Car Personally?
The lease type in this case is called a PCP or Personal Contract Plan. It works like a lease agreement where you pay a fixed amount each month for a set period to use the car. At the end of the term, you have the option to make a final large payment—typically around 50% of the car’s original value—to own the vehicle. If you decide not to pay that balloon amount, the car is returned to the finance company.
The benefits are:
- You get a new car to drive.
- Monthly lease payments are generally lower than a loan or even a Hire Purchase (HP).
- After 3 years, you can return the vehicle and upgrade to a new one—this cycle can continue as long as the lease terms are met.
- Since your business is not involved in the lease, there is no tax payable. It’s not considered a Benefit in Kind (BIK).
- Regardless of what happens to your business—whether you stay, leave, sell, or close it—the vehicle remains yours to use.
The downside:
Apart from claiming business-related mileage and travel expenses, you won’t be able to make any other claims through your business. This means no deductions for insurance, repairs, maintenance, or servicing.
What is Company Car Tax & Benefit in Kind?
Benefit in Kind is a benefit or a perk that the employee or director gets over and above the salary. Due to these benefits or perks, the package value received by employees and directors is higher, attracting tax on the equivalent amount.
Leasing a car through a company lease is like a benefit you receive from the company. You will have to pay tax on this benefit. This may make the benefit a bit less interesting.
The Benefit in Kind tax has to be paid when the company-leased car is used for personal reasons. On the other hand, using the car for business purposes does not attract tax on it.
In some cases, it may not be the wisest thing to do, as you may have to park the car at the office premises or in a designated parking spot and then take your personal car to drive home. In most cases, there is an overlap of business and personal use, attracting company car tax. This tax is computed based on two factors – the original cost of the vehicle and the impact it has on the environment. This means that the tax is higher for a costly car and those that are more polluting.
What are the Mileage Rates of Fuel When You Charge the Company?
For a personal lease car, you can charge your business for the mileage for business-related activities. The rates are as follows:
- For cars, the mileage rate is 55p per mile for the first 10,000 miles in 2026/27, then 25p.
- For motorcycles, the mileage charge is 24p per mile for the first 10,000 miles.
- For a bicycle, the mileage charge is 20p per mile for the first 10,000 miles.
After the first 10,000 miles, the rates drop. This often works out better compared to a company-leased car.
What About Commercial Vehicles?
It is different for vans and pickup vehicles. If commercial vehicles are used for personal journeys, there will be a tax charge, though it is lower than for cars.
The van benefit charge is £4,020. It is a fixed amount and applies irrespective of the vehicle type. If you are a basic rate (20%) taxpayer, you will be charged 20% on £4,020, which is £804.
Based on the environmental theme, the Benefit in Kind rate is 0% for zero-emission vans. This means that leasing a commercial vehicle is often a more attractive option for most people.
As part of the environmental push, the UK government is supporting greener transport initiatives. If your business leases vehicles like a PHEV (plug-in hybrid electric vehicle), an electric vehicle, or a low-emission vehicle, it could be an excellent way of not just reducing company car tax but also lowering your carbon footprint.
For electric vehicles used as company cars, the tax is only 1%. Even for a PHEV, the tax is quite low, based on its performance.
In case you cycle to your business, you benefit from a tax-free Cycle to Work scheme. You can also charge the business for the healthy miles you pedal for work at the mileage rate. This can actually save you money, thanks to the government’s green energy commitments.
Cangaf ltd Accountants are Here to Help You with Company Car Tax
For most people, company car tax can be quite complex. Even with a lot of information available online, the decision of whether to lease the car personally or through your business isn’t always straightforward. What works best for one person may not be the right option for someone else.
Thus, you need to analyse every angle, including your tax bracket, how much you use the car for business vs personal, whether you prefer to own the car eventually, the type of vehicle you’re looking at (petrol, diesel, hybrid, or electric), and how long you plan to keep it.
Leasing through the business can come with great perks like tax deductions and no personal liability, but it also means paying Benefit in Kind tax for any personal use. On the other hand, personal leasing gives you more flexibility and avoids company car tax, but you miss out on claiming expenses beyond mileage.
Everyone’s situation is different, so there’s no one-size-fits-all answer. If you’re unsure, it’s always best to speak to an expert accountant or a tax advisor at cangaf ltd to weigh up the pros and cons for your specific setup.
Still unsure whether leasing a car personally or through your limited company is right for you? Contact us today and speak to our expert accountants for tailored advice.
Further reading and official guidance
More guides and tools from our team:
Official guidance from HMRC and GOV.UK:
