Business car lease: how leasing a car through your limited company works

A business car lease rents a car to your limited company for a fixed term at a fixed monthly rental, and at the end you hand it back. Your company deducts the rentals from its profits and, if it's VAT-registered, normally reclaims half the VAT. What catches directors out sits on the other side of the deal: the tax the driver pays on a car the company provides, which on a £40,000 car can be nine times higher for a high-emission petrol car than for an electric one. Every other page ranking for this search earns money from the lease. We don't lease or broker cars, so we have no stake in which way you go.

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What a business car lease actually is

A business car lease is almost always business contract hire. A leasing company buys the car, your company rents it for a fixed term at a fixed monthly rental, and at the end you hand it back.

Four names come up once you start asking for quotes, and only the first is the agreement above:

• Business contract hire is what almost every business car lease is, and the name your quote will use. The rest of this page sticks to it.
• A finance lease is a different agreement. The rentals cover the full cost of the car, and at the end you can keep it on a small continuing rental or sell it on the leasing company's behalf.
• Personal contract hire is the same shape of deal in your own name rather than the company's. The rental includes VAT, and your company can't deduct it.
• Business contract purchase ends in ownership if you want it to, through a final payment agreed at the start. So does hire purchase, which spreads the whole price in instalments instead.

Your company never owns a contract hire car, so it carries no risk about what the car is worth in three years' time and builds up no value in it either. The leasing company is normally the registered keeper too, so the V5C stays with them and your company doesn't get one – worth knowing, because the keeper gets the penalty notices. If you'd rather own the vehicle, there are other ways to finance a vehicle that end up that way.

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What sets your monthly rental

There's no APR on a contract hire quote. The finance cost is built into the rental, which is why two quotes on the same car can look very different without either of them being wrong. Six things set the figure:

• The car's price, including options
• What the leasing company expects it to be worth when it comes back
• The initial rental you pay up front
• The annual mileage you agree to
• The length of the term, usually two to four years
• Optional extras, such as a maintenance package

Two of the six are yours to move, and both move the cost rather than remove it. Put less into the initial rental and the monthly figure goes up, because on contract hire the initial rental is rent paid in advance, not a deposit you get back. A no-deposit deal is the same arithmetic with all the cost in the monthly payments. A low mileage limit works the same way: it brings the rental down now and turns up later as an excess mileage charge.

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What a lease costs your company once tax is in

Three taxes decide what the car really costs: corporation tax on the rentals, VAT on the rentals, and the company car tax the driver pays for having it. The first two go your company's way. The third usually dwarfs both, and it is the one the quote won't mention.

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Your company deducts the rentals, with 15% disallowed above 50g/km

Rentals on a car at 50g/km or less come off your profits in full. Above 50g/km, HMRC's rule on hiring a car disallows 15% of the rental, so your company deducts 85% of it. The rule has applied to corporation tax periods since 1 April 2021.

It is easier to see on a round number. Here is what £100 of rental before VAT costs a VAT-registered company paying corporation tax at 25%:

So the disallowance costs £3.75 per £100 of rental. Worth knowing when you are choosing between two cars, and not enough on its own to decide anything.

Your company's own tax rate matters more than the disallowance does. Corporation tax is 25% on profits over £250,000 and 19% on profits of £50,000 or less, with marginal relief in between, so the same deduction is worth less to a smaller company. Vans sit outside the 15% rule altogether, which makes the tax on leasing a van simpler than the tax on leasing a car.

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You can normally reclaim half the VAT on the rentals

If your company is VAT-registered you can normally reclaim 50% of the VAT on the rentals. The blocked half covers private use, and HMRC treats ordinary commuting as private use – so the block applies even to a car the driver only uses to get to work. Full recovery is rare: VAT Notice 700/64 limits it to cars leased mainly for taxi work or driving instruction.

Maintenance is the exception worth asking for. Where the leasing company invoices it separately from the rental, the VAT on that part comes back in full. Bundled into one line, it is caught by the same 50% block, so ask for it as a separate line before you sign rather than after. Your other motoring costs follow the usual rules for claiming VAT back.

This is also the real reason a business quote looks cheaper than a personal one on the same car. A business rental is quoted before 20% VAT and a personal rental includes it, and your company then takes the rental off its profits, which no personal lease can do.

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The driver's company car tax is the bigger number

Whoever drives the car pays benefit-in-kind tax on a percentage of its list price, and your company pays Class 1A National Insurance at 15% on the same value. The percentage runs on what the car emits. It is 4% for a fully electric car in 2026/27 and 5% in 2027/28, against a maximum of 37% for a higher-emission car, held there until 5 April 2028.

On a £40,000 car that is a £1,600 taxable benefit at 4%, or £14,800 at 37%. For a higher-rate taxpayer the tax is about £640 a year in the first case and £5,920 in the second, with your company's Class 1A bill running alongside it at £240 against £2,220.

So the first question is less about leasing or buying than about whether this particular car belongs on the company at all. gov.uk's company car tax calculator gives the figure for a specific car, and the rates for later years sit in our guide to leasing an electric car.

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Lease, buy, or keep the car in your own name

Which is cheaper depends on what the rentals add up to and what the car would be worth when you were done with it. Leasing gives your company relief as it pays. Buying a car above 50g/km gives relief at 6% a year, so most of it arrives long after the car has gone.

Cars are shut out of the annual investment allowance and full expensing, so there is no quick write-off unless the car is new and fully electric, which gets a 100% first-year allowance. Above 50g/km you claim 6% of the cost a year, and between the two it is 14% from April 2026.

Here is the comparison on a £30,000 car above 50g/km, kept for 48 months and bought for cash by a VAT-registered company paying corporation tax at 25%. Over the car's life, relief works out on what it cost less what it sold for, and the timing is the part that differs. Maintenance and insurance are left out of both sides, and the blocked half of the rental VAT is not counted as a deduction.

On those assumptions, buying costs £13,500 after tax if the car sells for £12,000, and £16,500 if it sells for £8,000. Leasing costs £88.75 for every £100 of rental. So if you think £12,000 is realistic, leasing is cheaper while the total rentals before VAT come to less than about £15,200 – roughly £317 a month over four years. At an £8,000 resale the break-even moves out to about £18,600, or £387 a month.

The resale figures are illustrative rather than forecasts. To use them, add a quote's initial rental to all its monthly rentals, before VAT, and compare that total with the break-even for the resale value you would bet on.

Two things sit outside the arithmetic. If your company would borrow rather than pay cash, add the interest, whether that is hire purchase secured on the car or a business loan. And buying a car through the company brings trade-offs beyond tax. Company car tax is the same either way, so it does not tip this one.

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Claiming mileage on your own car

There is a third route, and on a petrol or diesel car it is often the cheapest of the three. If a director owns the car personally, your company can reimburse business mileage at 55p a mile for the first 10,000 business miles from 6 April 2026, then 25p, and there is no benefit-in-kind at all. Note the rate: it went up from 45p in April 2026, and most of what is written about this still quotes the old figure (rules for business mileage).

It suits high business mileage and a car that would attract a large benefit charge. It suits you less when the mileage is low: the reimbursement is all your company gets to deduct, and you are buying the car with money you have already taken out of it. Which of the three is cheapest turns on your mileage, the car, and your company's profits, so put your own numbers to an accountant.

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Whether your company will qualify

The leasing company underwrites your company rather than you. It looks at your filed accounts, your credit file, and whether the rentals look affordable against what the business turns over. There is no single trading-history rule: some funders decline a company with under two years of filed accounts and others will look, so a decline from one is not a decline from all.

A lease shows up afterwards as well. The agreement can appear on your company's credit file, which means paying on time helps your next application and missed payments count against it. If the picture is weaker than you expected, there is time to build your company's credit score before you start asking for quotes.

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What the leasing company asks for

None of it is unusual, and having it to hand is what makes a quote quick:

• Your company number, registered address, and VAT number
• Recent business bank statements
• Your latest filed accounts, plus management accounts if the last set is old
• Director details and consent for a credit search
• Proof of identity and address for the director signing

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A newer company is usually asked for a guarantee or a bigger initial rental

A newer company can still lease a car. It is just more likely to be asked for a director's personal guarantee, a larger initial rental, or both.

A guarantee makes that director personally liable for the rentals if the company cannot pay them, so read what you would be signing before you agree to it. A larger initial rental does the same job differently, by getting more of the cost paid before the risk starts. More than one car usually goes on a single agreement, which keeps the paperwork and the renewal dates together.

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The costs beyond the monthly rental

The rental is the number on the quote. These are the ones that turn up later:

• Initial rental. Due before the car arrives.
• Insurance. Usually fully comprehensive and in the company's name, because the car stays the leasing company's property.
• Maintenance. Servicing, tyres, and repairs are yours unless you take a package.
• Excess mileage. Charged per mile over the agreed limit.
• Fair wear and tear. The car is inspected when it goes back, and damage beyond the standard is charged for.
• Road tax. Usually inside the rental, so check the quote rather than assume it.

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Ending the lease early

Ending a business car lease early costs whatever your contract says it costs. There is no standard figure, and the published ones vary so widely that none of them is yours. Only half the VAT on the charge comes back, too: since 1 April 2022 HMRC treats an early termination charge as further rental.

What is worth knowing is what your company is not protected by. The Consumer Credit Act 1974 protects an 'individual', and section 189 defines that as a person, certain small partnerships, or an unincorporated body. A limited company is none of those. So the voluntary termination right and the cooling-off period that come with a personal agreement do not apply, and once the order is signed your company is committed. Find the termination clause before you sign rather than after.

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At the end of the term the car goes back

On contract hire the car goes back to the leasing company. You can usually re-lease, extend for a few months, or start again with a newer car. What you cannot do is buy it: an agreement that ends in ownership is a business contract purchase or hire purchase, and that is a decision made at the start rather than at the end.

A few months before handback, check your mileage against the limit so you know what any excess will cost, and look the car over against the fair wear and tear standard your agreement names. Both are cheaper to put right now than to be charged for later.

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How to compare quotes before you sign

Quotes come from leasing companies and brokers. Two of them on the same car, on different terms, are not comparable at all, so line them up like this:

• Total, not monthly. Add the initial rental to every monthly rental. A low monthly figure often means a big initial one.
• The same terms on every quote. Same length, same annual mileage, same initial rental.
• What is included. Maintenance, tyres, and road tax – and ask for maintenance on a separate line.
• The excess mileage rate, in pence per mile over the agreed limit.
• The early termination clause. What ending early would cost in each year of the term.
• The broker. Check it is authorised on the FCA register.

Used-car contract hire exists too, and the tax rules are the same, so it is worth asking whether a nearly new car would do the job.

The initial rental is the one figure that falls due before the car arrives, and it can land in the same month as a VAT bill or a quiet month for receipts. If that timing is the obstacle rather than the car, an iwoca Flexi-Loan is a business loan with flexible repayment options. We charge interest only on what is outstanding, for the days you use it, and there is no fee for repaying early, so you can cover the rental and clear it when the receipts come in. It will not make the lease cheaper, though: if day-one cash is not the problem, a quote with a smaller initial rental will serve you better.

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