Car Leasing Through Your Business

UK Business Tax Guide · 2026/27

Car Leasing Through Your Business

Thinking of leasing a car through your limited company or business? Discover how Corporation Tax relief, VAT recovery and company car tax affect the real cost — and whether an electric car could be the more tax-efficient choice.

✓ Tax deductions ✓ VAT recovery ✓ Electric car BiK

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Business Car Leasing · UK Tax Guide

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Corporation Tax Relief On qualifying business lease costs

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VAT Recovery Subject to business eligibility

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4% Electric Car BiK 2026/27 company car tax rate

UK business car leasing guide • 2026/27

Can you lease a car through your business?

Yes. A UK limited company can lease a car for business use and may obtain Corporation Tax relief on qualifying lease costs. VAT-registered businesses can normally reclaim 50% of the VAT on qualifying car rental payments where private use is permitted. However, a director who can use the vehicle privately will normally face a taxable company car benefit.

Electric vehicles can be particularly attractive because of their comparatively low Benefit in Kind (BiK) rates. The right decision depends on the lease cost, vehicle emissions, VAT position and personal tax circumstances.

Limited companies Sole traders Corporation Tax VAT recovery Electric vehicles

The essentials

How does car leasing through your business work?

Business contract hire allows a company to rent a vehicle for an agreed period, usually with fixed monthly payments and a mileage allowance. The vehicle is normally returned at the end of the agreement.

01

Choose your vehicle

Compare electric, hybrid, petrol and diesel vehicles, including their list prices and CO2 emissions.

02

Arrange the lease

The business enters into a lease agreement, subject to credit approval, and pays the initial rental and monthly charges.

03

Account for the tax

Record lease expenses, consider VAT recovery and report any taxable company car benefit arising from private availability.

Important: Contract hire, hire purchase and lease purchase are not interchangeable. The accounting and tax treatment depends on the actual agreement and applicable accounting standards.

Corporation Tax

Are business car lease payments tax deductible?

Qualifying car rental expenses can generally reduce a company's taxable profits. However, the deduction for most car leases is restricted according to CO2 emissions.

Vehicle emissions	Usual allowable rental deduction	Restriction
0g/km (fully electric)	100%	No emissions-based rental restriction
1–50g/km	100%	No emissions-based rental restriction
Over 50g/km	85%	15% of otherwise allowable rental costs disallowed

These are the standard emissions-based restrictions for relevant car hire agreements, not an automatic guarantee that every expense is deductible. Non-recoverable VAT may form part of the rental expenditure subject to the restriction. Special lease arrangements and accounting rules can require different treatment.

VAT explained

Can you reclaim VAT on a business leased car?

VAT on monthly rental payments

For a VAT-registered business leasing a qualifying car, the normal rule is that 50% of the rental VAT is blocked to account for private use.

The remaining 50% may be recoverable subject to the usual VAT rules. Full recovery may be available in qualifying circumstances, such as certain exclusively business-use vehicles or taxis.

VAT on maintenance and servicing

VAT on separately identified maintenance and servicing charges may be recoverable under the normal business input-tax rules.

Full recovery is not automatic: business use, partial exemption and the nature of the supply must be considered.

Example: A monthly rental of £400 plus £80 VAT could allow a qualifying fully taxable business to recover £40 VAT under the normal 50% leasing restriction. Its effective rental cost would therefore be £440 before tax relief.

Director taxation

Company car Benefit in Kind tax in 2026/27

If a director or employee has a company car available for private use, including ordinary commuting, a taxable Benefit in Kind will normally arise. The calculation generally uses the car's taxable list price (P11D value), its appropriate percentage and any relevant adjustments.

Car type	2026/27 BiK percentage	Notes
Fully electric (0g/km)	4%	Usually the lowest company car tax band
Plug-in hybrid, 1–50g/km	4%–16%	Depends on qualifying electric range
Petrol, 100–104g/km	26%	Illustrative emissions band
Petrol, 150–154g/km	36%	Higher taxable benefit
Higher-emission vehicles	Up to 37%	Diesel supplements may apply

Actual rates depend on emissions, electric range, fuel type and other HMRC rules. The table is a guide, not a complete BiK rate schedule.

Interactive example

Business car lease tax calculator

Estimate the annual Corporation Tax deduction benefit, VAT recovery and personal company car tax for a standard business contract hire arrangement.

Monthly rental excluding VAT (£)

Car P11D list price (£)

VAT recovery assumption50% of rental VATNo VAT recovery100% recovery (if eligible)

CO2 emissions category50g/km or lessOver 50g/km

Company car BiK percentage4% — electric 2026/277%10%16%26%36%37%

Director's marginal Income Tax rate20%40%45%42% (Scottish)48% (Scottish)

Illustrative Corporation Tax rate19%25%

Annual rental including VAT—

Estimated VAT reclaimed—

Rental cost after VAT recovery—

Illustrative Corporation Tax relief—

Director's annual BiK Income Tax—

Employer Class 1A NI on car benefit—

Illustrative combined annual cost—

Illustration only. Assumes a standard rental agreement, 20% VAT, full-year private availability, no employee contributions, no separate maintenance, and sufficient taxable profits. The combined cost is rental after VAT recovery, less estimated Corporation Tax relief on rentals, plus personal BiK tax and employer Class 1A NI. It excludes tax relief on Class 1A NI, running costs, finance/accounting adjustments, marginal Corporation Tax relief and other personal tax interactions. It is not a personal-versus-business leasing comparison.

Making the right choice

Business leasing vs personal leasing

Consideration	Business leasing	Personal leasing
Lease contract	Normally in the company's name	In the individual's name
Tax relief	Qualifying company rental expenses	Potential business mileage claims under applicable rules
VAT recovery	Potential recovery if VAT registered and eligible	Normally unavailable to a private individual
Private use	Normally creates BiK where available to a director or employee	No company car BiK simply from personally leasing
Best suited to	Often worth examining for low-emission cars	Often worth comparing for high-BiK vehicles

Business structure

Limited company vs sole trader: what changes?

Limited company directors

• The company can enter into the lease.
• Qualifying costs may reduce Corporation Tax profits.
• Private availability normally creates a company car BiK.
• Employer Class 1A National Insurance may arise.
• Company and personal tax costs should be compared together.

Sole traders

• The trader can lease a car for their business.
• Business-use expenditure may be deductible subject to the applicable rules.
• Private use generally requires an adjustment to actual expenses.
• There is normally no company car BiK charge on the trader's own car.
• Simplified mileage expenses may be an alternative where eligible.

Electric vehicles

Is leasing an electric car through your company worth it?

Fully electric cars can be attractive for limited company directors because the emissions-based rental restriction does not normally apply and the company car BiK percentage remains comparatively low.

Example: £40,000 electric company car

Assuming the vehicle is available for private use throughout 2026/27 and there are no adjustments:

Calculation	Annual amount
Car P11D value	£40,000
2026/27 electric car BiK percentage	4%
Taxable company car benefit	£1,600
Income Tax at 40%	£640
Employer Class 1A NI at 15%	£240

The BiK calculation is based on the car's taxable list price, not its monthly lease rental. The company must also consider rental payments and associated costs.

Before signing

How to lease a car through your limited company

1

Calculate total costs

Include initial rental, monthly payments, insurance, mileage charges and possible end-of-contract costs.

2

Compare the tax outcomes

Calculate Corporation Tax relief, VAT recovery, personal BiK and employer National Insurance.

3

Check the agreement

Confirm whether the arrangement is contract hire, finance lease or lease purchase and review the accounting treatment.

4

Consider private use

Determine whether the vehicle is available for private journeys and whether a taxable benefit will arise.

5

Keep supporting records

Retain lease documents, VAT invoices, mileage evidence where relevant and business expense records.

6

Report the benefits

Account for any company car benefit through the applicable HMRC reporting or payrolling process.

Frequently asked questions

Car leasing through your business FAQs

Can I lease a car through my limited company for personal use?

Yes. However, if the vehicle is available for private use, including ordinary commuting, a taxable company car benefit will normally arise. The company may also have employer National Insurance obligations.

Can I claim 100% of my business car lease payments?

Qualifying rental costs for cars emitting 50g/km CO2 or less generally avoid the 15% emissions-based restriction. Cars emitting more than 50g/km normally face a 15% restriction. Other deductibility and lease accounting rules still apply.

Can my company reclaim all the VAT on an electric car lease?

Not automatically. The standard 50% VAT block on qualifying car rentals can apply to electric cars too. Full recovery requires the relevant conditions to be met, and the normal input-tax rules still apply.

Is business car leasing cheaper than personal leasing?

It depends on the overall cost. Company tax relief and VAT recovery may be offset by Benefit in Kind tax and employer National Insurance. Compare both arrangements using the same vehicle, mileage and contract term.

Can a sole trader lease a car through their business?

Yes. A sole trader can generally claim eligible business-use leasing expenditure, subject to private-use adjustments and the applicable rental restrictions. The tax treatment differs from a limited company director receiving a company car.

Is an electric car lease fully tax deductible?

A qualifying fully electric car lease normally avoids the 15% CO2-based rental restriction. This does not mean the government pays for the lease or that all associated costs automatically qualify for relief.

Does a business leased car have to be used only for work?

No. Private use may be permitted under the agreement, but it normally affects the director's or employee's tax position. VAT recovery and other rules must also be considered.

Can I claim business mileage on a company leased car?

The normal approved mileage allowance payment rules for employees using their own cars do not apply in the same way to a company-provided car. Different advisory fuel or electricity rates and reimbursement rules may be relevant.

The Online Accountants

Considering leasing a car through your company?

Before signing a lease, understand the combined impact of Corporation Tax, VAT, Benefit in Kind and employer National Insurance.

Speak to an Accountant → View Our Fees

Official HMRC guidance and further reading

This guide reflects UK tax rules for 2026/27 and should be reviewed following future tax changes. Key primary sources:

• HMRC: restriction of car leasing costs
• HMRC: VAT on motoring expenses
• HMRC: company car BiK percentages
• HMRC: employer tax and NI rates 2026/27

Prepared by The Online Accountants. General information only; the appropriate treatment depends on your business and lease agreement.