Leasing vs Buying a Company Car
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- A typical new car loses around half its value over the first three to four years - the single biggest cost of ownership, and one a lease transfers to the funder.
- A business buying a new zero-emission car before April 2027 can claim a 100% first-year capital allowance, deducting the full cost from profits in year one (HMRC).
- Bought cars with emissions of 1-50g/km attract writing-down allowances at 14% a year (18% before April 2026); above 50g/km the rate drops to 6%, so relief arrives very slowly.
- Leased cars work the other way: rentals are deductible as paid - in full at 50g/km or below, with a 15% restriction above (HMRC).
- VAT usually favours leasing: 50% of the VAT on rentals is typically recoverable (100% for sole business use, depending on circumstances), while VAT on a purchased car with any private use is normally blocked entirely.
- From accounting periods beginning 1 January 2026, revised FRS 102 puts most leases on the balance sheet - the old off-balance-sheet argument for leasing has largely gone.
- Company car tax for the driver is identical either way: Benefit-in-Kind follows the car's emissions, not how the company funds it.
- Fleets and businesses now acquire the majority of new cars in the UK, and contract hire is the dominant funding method among them (BVRLA/SMMT).
The real question: who carries the depreciation?
Strip away the jargon and the lease-or-buy decision is a question about risk. A new car is a depreciating asset: typically it sheds around half its value across the first three to four years, faster at the premium end of the market and less predictably for electric cars, where used values have moved sharply in recent years. Whoever owns the car owns that uncertainty. Buy, and your business carries it: the eventual resale value is unknown on the day you commit. Lease, and the funder prices its own forecast of the residual value into a fixed rental, then carries the outcome, good or bad.
Neither answer is automatically right. A business that buys well, keeps cars for six or eight years and sells sensibly can do perfectly well out of ownership. A business that changes cars every three or four years, values predictable costs and would rather deploy its capital in the business itself will usually find Business Contract Hire the cleaner instrument. The rest of this guide puts structure around that intuition, starting with where the money actually goes over a typical four-year cycle.
The four-year cost of ownership, component by component
Four years is the natural comparison window: it matches the most common lease terms and sits inside most manufacturer warranties. The table below walks the cost components side by side. Deliberately, there are no illustrative payment figures here - your own quotes and your accountant's projections should populate it - but the structure shows where each route wins and loses.
| Cost component | Buying (outright or on finance) | Leasing (Business Contract Hire) |
|---|---|---|
| Depreciation | Borne by the business - the gap between purchase price and eventual sale value, typically around half the car's value over the period | Priced into the fixed rental; residual-value risk sits with the funder |
| Cash at the outset | Full price, or a deposit plus borrowing with interest | An initial rental, typically a few months' equivalent, then fixed monthlies |
| Road tax | Paid and administered by the business each year | Included for the term of the contract |
| Servicing and tyres | Pay as you go, rising as the car ages | Pay as you go, or fixed via an optional maintenance package |
| Disposal | The business markets, negotiates and sells the car, with the admin and timing risk that entails | Hand the car back; excess mileage and damage beyond fair wear and tear are chargeable |
| End of the period | The business owns an ageing asset it can keep or sell | No asset, no resale proceeds - and no exposure if used values have fallen |
Framework comparison for general guidance. Populate it with quotes and projections for the specific car and term you are considering; your accountant can model both routes on your own figures.
Two components dominate in practice. Depreciation is the heavyweight, and it explains why leasing has grown fastest among businesses that replace cars regularly: over a four-year cycle the owner realises most of the car's lifetime value loss, then must go through the sale process to crystallise what remains. And the cost of capital matters more than it looks: money sunk into a wasting asset is money not working in the business, which is a real cost even when no interest is being paid. Our UK vehicle finance statistics guide shows how decisively UK businesses have shifted towards contract hire as a result.
Build a traceable input sheet
Let T be the common period and M the expected mileage over it. For each route and each date, record gross company cash outflows C, recoverable VAT V, actual tax cash savings Q, employer NIC N and net end proceeds S. Running costs and vehicle taxes belong in C unless separately itemised; do not count them twice.
The undiscounted company-cost model is: sum of C plus N, less V, Q and S over the chosen period. Recoverable VAT is subtracted only if C was entered gross. If your inputs are already net of recoverable VAT, omit that second subtraction. A tax deduction is not itself Q: the adviser must calculate whether and when it creates a tax cash saving.
For outright buying, C includes the acquisition payment. If using acquisition cost plus financing interest and fees, exclude repayment of borrowing principal from C. Alternatively, use the actual finance cash flows, including principal, and exclude the financed acquisition amount. Treat any company-funded acquisition portion consistently. Mixing both bases double counts the vehicle.
At the end date, deduct net sale proceeds only once. Where actual finance cash flows are used, include any outstanding settlement in the end cash position. Do not also subtract that same debt from a sale value already entered net of settlement. An owned car retained at T needs a stated terminal-value assumption rather than a fictitious cash sale.
| Input | Record | Evidence or treatment |
|---|---|---|
| T and M | Common dates and mileage | Business requirement, journey expectation and actual agreement scope |
| C: gross company outflows | Vehicle, running costs, fees and vehicle taxes by date | Quotation or invoice; identify included items and exclusions |
| V: VAT recovered | Only recoverable VAT and its cash timing | Accountant-reviewed VAT treatment and return periods |
| Q: tax cash savings | Allowable deductions, effective tax treatment and cash dates | Accountant model including restriction, capital allowances and disposal effects |
| N: employer NIC | Taxable vehicle benefit and applicable employer NIC by year | P11D and benefit inputs; payroll/tax review |
| S: net end proceeds | Sale or terminal value; settlement and selling costs treated once | Independent valuation assumptions, finance position and sensitivity |
| Driver tax | Separate personal ledger | Individual tax position, benefit path and relevant contributions |
Tax treatment: capital allowances against rental relief
The tax system treats the two routes quite differently, and the car's CO2 figure is the hinge in both cases. Buy, and relief comes through capital allowances. A new zero-emission car bought before April 2027 qualifies for a 100% first-year allowance, so the entire cost can be set against profits in the year of purchase - a genuinely powerful incentive for a profitable business buying electric. Away from that special case the picture is slower: cars at 1-50g/km attract writing-down allowances at 14% a year on a reducing balance, and cars above 50g/km at just 6%, which means a petrol or diesel purchase drags its tax relief out over many years.
Lease, and relief follows the rentals instead: each payment is a deductible trading expense as it falls, in full for cars at or below 50g/km and with a flat 15% disallowance above that line. VAT then tilts the same way. A company buying a car that has any private use normally cannot recover the VAT on the purchase at all, while a VAT-registered company leasing the same car can typically reclaim 50% of the VAT on the rentals, and all of the VAT on a maintenance package, depending on circumstances. For the driver's own tax position the funding route is irrelevant: Benefit-in-Kind follows the car's emissions whether the company owns it or leases it, which is why the 4% electric band dominates that side of the equation either way - our company car tax and BIK rates guide has the full tables.
VED, the supplement and proposed eVED
For 2026/27, standard annual car VED after the first year is £200. First-year treatment depends on the vehicle and registration rules; zero-emission cars currently have a £10 first-year payment. Do not repeat that first-year amount as the annual cost for the rest of the period.
The Expensive Car Supplement is currently £440 per year for five years from the second licence where the list-price and registration conditions apply. The threshold is more than £40,000 for petrol, diesel and hybrid cars, or more than £50,000 for qualifying zero-emission cars registered from 1 April 2025. Use the relevant list price including options, not a negotiated purchase price.
Current VED and supplement cash amounts are for 2026/27. Later annual amounts need updating. Under hire, check the agreement’s treatment of included vehicle tax and later increases. A statement that road tax is included does not establish that the company is insulated from every future change.
eVED is proposed from April 2028, additional to VED, with starting rates of 3p per mile for electric cars and 1.5p for plug-in hybrids. It is not currently in force and remains subject to legislation and implementation. CPI uprating is proposed from 2029/30; later cash figures are not confirmed here.
Keep the proposed charge in a separate scenario and record whether the funder’s contractual pass-through is confirmed. Whether a specific hire agreement passes a future eVED charge through to the customer, and on what basis, depends on its written terms: do not treat it as already included, absent or fixed at an unchanged figure for the whole term.
The balance sheet: what actually changed in 2026
For years, one of the stock arguments for leasing was that the car stayed off the balance sheet. It is time to retire that line. For accounting periods beginning on or after 1 January 2026, the revised FRS 102 standard removes the old distinction between operating and finance leases: most leases, including car leases held by small companies reporting under Section 1A, now go on the balance sheet as a right-of-use asset with a matching lease liability. Only short-term leases under twelve months and low-value assets escape, and a car is not a low-value asset.
Does that weaken the case for leasing? Not really - it just relocates it. The substantive advantages were never accounting presentation: they are the fixed cost, the transferred residual-value risk, the VAT recovery and the alignment of payment with use. Those all survive. What the change does mean is that directors should expect their gearing and balance-sheet ratios to look different from 2026, and should ask their accountant how the new treatment lands in their specific accounts, particularly where banking covenants reference balance-sheet measures. Micro-entities and the precise transition mechanics are matters for professional advice.
A decision framework for directors
Put the cost, tax and risk threads together and the decision usually resolves along a handful of lines. Use the table below as a starting framework, then pressure-test the answer against your own cash position and plans. If you are weighing this as a company director, the Benefit-in-Kind arithmetic and the personal service company detail are set out in our guide to company car leasing for directors.
| Leasing tends to fit when... | Buying tends to fit when... |
|---|---|
| You change cars every three to four years and want each cycle predictable | You keep vehicles well beyond five years and run them down the depreciation curve |
| Capital is better deployed in the business than in a depreciating asset | The business has surplus cash and no better internal use for it |
| You want fixed motoring costs, road tax included, with optional maintenance | You are comfortable managing variable running costs and disposal yourself |
| Your mileage is predictable enough to set a sensible contract mileage | Mileage is genuinely unpredictable, or the car will be modified or worked hard |
| You are wary of used-value risk, especially on fast-evolving electric cars | You are buying a new zero-emission car before April 2027 and can use the 100% first-year allowance against strong profits |
General guidance, not advice. The right answer depends on your company's cash flow, profitability, VAT position and replacement cycle - model both routes with your accountant.
Notice how often the electric question decides it. A profitable company buying a new electric car before April 2027 gets the one genuinely generous ownership incentive in the system. Set against that, leasing an electric car captures the same 4% Benefit-in-Kind for the driver, adds the VAT recovery on rentals that a purchase forfeits, and sidesteps the most volatile used-value segment of the market. Both routes have a real case; which one wins is an arithmetic question on your numbers, not a matter of fashion. Our electric car leasing hub covers the practical electric questions in depth.
How IVF helps you make the call
Intelligent Vehicle Finance is a phone-first, FCA-authorised leasing broker and BVRLA member. We are candid about the fact that we arrange leases rather than sales: what we bring to this decision is whole-of-panel Business Contract Hire and Personal Contract Hire terms across the full range of cars we can source, presented clearly enough to set against a purchase quotation like for like. We are a credit broker, not a lender, and we may receive a commission from lenders for introducing customers to them. Call 01752 429950, tell us the car and term you are weighing, and a named specialist will give you the leasing side of the comparison in writing, with no cost and no obligation.
Next steps: pages from Intelligent Vehicle Finance
If the framework above points to leasing, business car leasing explains how IVF arranges it for companies and electric car leasing covers the models that attract the least company car tax. If a nearly-new vehicle changes the sums, see used car leasing. For the tax detail, VAT on business car and van leasing works through a lease invoice line by line, and company car or car allowance compares a company car with paying a cash allowance instead. A company that has not filed accounts yet should start with new business car leasing. Senior-management vehicles are on prestige car leasing, and all our guides are at IVF leasing guides.
Leasing vs buying FAQs
Sources
First-year and writing-down allowance rules are from gov.uk capital allowances. The lease rental restriction is from HMRC BIM47725. Benefit-in-Kind percentages are from HMRC's published 2026/27 tables. The lease accounting change is the Financial Reporting Council's periodic-review amendments to FRS 102, effective for periods beginning on or after 1 January 2026. Market context is from the BVRLA Leasing Outlook and SMMT registration data, as compiled in our UK vehicle finance statistics guide. Figures were correct at September 2026 and are refreshed as rules change. Vehicle tax figures are from GOV.UK's Vehicle tax rates: Cars registered on or after 1 April 2017 and the Government's eVED consultation response; the VAT treatment of car hire is from HMRC's Motoring expenses (VAT Notice 700/64).
Reviewed by Stacey Smith, Brand Director, Intelligent Vehicle Finance. Last updated: September 2026.
This guide is general information, not financial, tax or accounting advice. Tax and accounting treatment depend on individual circumstances and may change. The comparison framework contains no offer of finance and no payment illustrations. Always consult your accountant before acting.
Intelligent Vehicle Finance is a trading style of XLCR Vehicle Management Ltd, authorised and regulated by the Financial Conduct Authority (FRN 315268), and a BVRLA member. IVF is a credit broker, not a lender, and may receive a commission from lenders for introducing customers to them.