Car Leasing Through Your Business
Leasing a car through your limited company can offer tax advantages, improve cash flow and present a more professional image. But is it the right move for your business?
Business Car Leasing: A Complete Guide (2025)
In this guide, we’ll walk you through how business car leasing works, the tax implications and whether it’s more beneficial than personal leasing. Written by chartered accountants and tax advisors, this article reflects current HMRC guidance and the 2025/26 tax year thresholds.
What Is Business Car Leasing?
Business car leasing—also known as contract hire—is an arrangement where your company rents a vehicle for an agreed term and mileage. The company pays fixed monthly instalments, and at the end of the term, the car is returned (or optionally purchased if structured as a lease purchase).
This setup is popular among limited company directors, freelancers, and small business owners wanting a predictable and potentially tax-efficient vehicle expense.
Key Benefits of Leasing Through Your Business
| Benefit | Description |
|---|---|
| Tax Efficiency | Lease payments may be offset against corporation tax, subject to CO2 limits. |
| VAT Recovery | Reclaim up to 50% of VAT on lease payments and 100% on maintenance if VAT-registered. |
| Fixed Costs | Monthly payments make budgeting easier and cash flow more predictable. |
| No Depreciation Risk | The leasing company bears the vehicle's loss in value over time. |
| Professional Image | A modern company vehicle reflects positively on your brand. |
Tax Implications: What You Need to Know
1. Corporation Tax Relief
Your business can deduct lease payments as an allowable expense.
However, this is capped based on the car’s CO2 emissions:
100% deduction: Cars under 50g/km CO2 (electric or plug-in hybrids).
85% deduction: Cars over 50g/km (a 15% disallowance applies).
2. VAT on Leasing
50% VAT recovery on the finance element of lease payments if the car is also used for personal purposes.
100% VAT recovery on maintenance and servicing costs.
3. Benefit-in-Kind (BiK) Tax
If a company car is available for personal use, directors/employees must pay income tax on a Benefit-in-Kind (BiK).
BiK rates are based on:
CO2 emissions
List price of the car
Fuel type
Electric cars (0g/km) attract the lowest BiK rates (currently 2% for 2025/26).
Should You Lease a Car Personally or Through Your Limited Company?
This decision hinges on:
The car’s CO2 emissions
Your income tax band
The nature of your business usage
Whether the car is used privately
Here’s a simplified comparison:
| Factor | Leased Personally | Leased via Company |
|---|---|---|
| Tax relief | Claim mileage (45p/25p per mile) | Corporation tax deductible (CO2-dependent) |
| VAT recovery | Not applicable | 50% lease, 100% maintenance (if VAT-registered) |
| BiK tax | None | Applies if personal use allowed |
| Running cost coverage | Paid personally | Paid by company |
When Does It Make Sense to Lease Through Your Company?
It often makes financial sense to lease via your limited company if:
You’re leasing an electric or low-emission vehicle
Your company is VAT-registered
You use the car significantly for business travel
You want predictable monthly expenses and avoid depreciation
But if:
You’re a high-rate taxpayer
You want a high-emission or luxury vehicle
The car is mostly for personal use
…then leasing personally and claiming mileage may be more tax-efficient.
Common Pitfalls to Avoid
Not calculating BiK impact – even a tax-deductible lease can become expensive if BiK charges are high.
Assuming VAT is always reclaimable – 50% rule applies unless strictly for business.
Leasing inefficient vehicles – CO2 limits can reduce your tax relief.
Not getting written policy for private use – HMRC may treat any vehicle as available for private use unless documented otherwise.
Electric Cars: The Smart Option for 2025/26
With generous BiK rates and full tax deductions for lease costs, electric cars offer standout benefits:
| Electric Car Leasing (2025/26) |
|---|
| BiK rate: 2% |
| 100% corporation tax deduction on lease payments |
| 100% VAT recovery on maintenance costs (if VAT-registered) |
| Road tax (VED) exempt or minimal |
Choosing electric vehicles for your business can lead to thousands in savings annually.
Step-by-Step: How to Lease a Car Through Your Company
Determine Business Need
Consider usage, mileage, and emission targets.Check VAT Registration Status
Ensure your company is eligible to reclaim VAT.Choose the Right Leasing Provider
Compare contract hire deals with transparent business terms.Structure the Agreement
Clearly define business vs personal use.Set up Payroll for BiK (if applicable)
Use P11D or payroll software to account for BiK tax.Track Usage and Retain Records
Maintain logs and agreements for HMRC compliance.
FAQs: Car Leasing Through Business (2025/26)
Is it better to lease or buy a company car?
Leasing is often better for cash flow and tax efficiency, especially with electric or hybrid cars. Buying may make more sense if you intend to use the vehicle long-term or want to avoid mileage restrictions.
Can a sole trader lease a car through their business?
Yes, but the same rules on tax deductions and personal use apply. You’ll typically claim a percentage of costs based on business use.
Do I have to pay tax if I use the car privately?
Yes. This is classified as a Benefit-in-Kind and taxed through your personal income tax return or payroll.
What paperwork do I need?
Keep lease agreements, mileage logs, maintenance records, and any usage policies in case of HMRC queries.
Final Thoughts
Leasing a car through your business can offer real financial advantages, especially for VAT-registered limited companies opting for low-emission vehicles. However, BiK tax and CO2 limits mean it’s essential to calculate the true cost.
Speak with an accountant or tax advisor before signing any agreements—especially if you’re unsure about personal use or VAT recovery.
Need Help Choosing the Best Car Leasing Option for Your Business?
Our team of expert accountants can help you evaluate your options, optimise tax efficiency, and avoid HMRC pitfalls. Get in touch today ➝