Tax Implications of Leasing vs. Buying a Car for Business Owners

When you run a business in the UK, every pound you spend on a vehicle matters-not just for operations, but for your tax bill. Choosing between leasing and buying a car isn’t just about monthly payments or mileage limits. It’s about how much you can legally deduct from your taxable income. And the difference can be thousands of pounds a year.

Leasing: Deducting the Full Monthly Payment

If you lease a car for business use, you can usually claim the full monthly lease payment as a business expense. That’s it. No depreciation schedules, no capital allowances to calculate. Just subtract the lease cost from your profits, and your tax bill drops.

But there’s a catch: if the car emits more than 50g/km of CO₂, HMRC limits your deduction. For cars with emissions above that threshold, you can only claim 85% of the lease cost. The remaining 15% is disallowed. For example, if your monthly lease is £400, you can only deduct £340 per month if the car emits 120g/km. That’s £1,020 less in deductions per year.

On the flip side, if your leased car emits 50g/km or less-like a Tesla Model 3, Nissan Leaf, or Hyundai Ioniq 5-you can claim 100% of the lease cost. No limits. No reductions. That’s why many small businesses are switching to electric vehicles: not just for the environment, but for the tax break.

Also, remember that any personal use of the leased car must be tracked. If you use it for private trips, you’ll need to report a Benefit-in-Kind (BiK) on your personal tax return. But for the business, the deduction stays intact as long as the vehicle is primarily used for work.

Buying: Capital Allowances and Writing Down Allowances

When you buy a car outright, you don’t get to deduct the full price in one go. Instead, you claim capital allowances through the Annual Investment Allowance (AIA) or Writing Down Allowance (WDA).

Here’s how it works: if the car you buy emits 50g/km or less of CO₂, you qualify for a 100% First-Year Allowance. That means you can write off the entire cost in the year you purchase it. A £30,000 electric van? You deduct £30,000 from your profits. Your taxable profit drops by that amount. Simple.

But if the car emits more than 50g/km, you’re stuck with the Writing Down Allowance. That’s 6% per year on a reducing balance. So if you buy a £25,000 petrol SUV, you can only claim £1,500 in the first year, £1,410 in the second, £1,325 in the third, and so on. It takes over 15 years to fully write off the cost. Meanwhile, a leased car with the same emissions would let you deduct the full monthly payment every single month.

And here’s the kicker: if you buy a car and use it for both business and personal trips, you must apportion the capital allowance. If you drive it 70% for business, you can only claim 70% of the allowance. Leasing doesn’t require this split for the business expense-only for your personal BiK.

What About Fuel and Maintenance?

Both leasing and buying let you claim fuel and maintenance as business expenses-but only the business portion.

If you lease, your maintenance package is usually included. That’s a bonus. You don’t need to track oil changes or tyre replacements separately. The lease payment covers it, and you deduct the full amount (subject to emissions rules).

If you buy, you pay for repairs and fuel yourself. Keep every receipt. You can claim 100% of fuel used for business trips, but you must either:

• Track every business mile and claim the HMRC-approved rate (currently 45p per mile for the first 10,000 miles, then 25p after), or
• Claim actual fuel costs, but only for business use, and prove it with logs.

Most small business owners find the mileage rate easier. No receipts needed. Just a logbook. HMRC accepts it if you’ve recorded dates, destinations, and purposes for each trip.

Insurance, Tax, and Other Costs

Business insurance, road tax (VED), and breakdown cover? All deductible. Whether you lease or buy, you can claim these as business expenses.

But here’s where people get tripped up: if you lease, the insurance is often included in the monthly payment. That’s fine-you still deduct the full amount. If you buy, you pay insurance separately. As long as it’s a business vehicle, you deduct it.

Don’t forget vehicle excise duty. For cars registered after April 2017, the first-year rate depends on CO₂ emissions. After that, it’s a flat annual fee unless it’s zero-emission. Zero-emission cars pay £0 in VED. That’s another £150-£500 saved per year.

Which Option Saves More Tax?

Let’s compare two scenarios, both with a £30,000 vehicle used 80% for business.

For a low-emission car, buying wins big in Year 1. You get £30,000 off your profits. That could knock your tax bill down by £6,000-£12,000, depending on your rate. But if you’re a sole trader or partner in a partnership, you might not have enough profit to use the full allowance in one year. In that case, leasing gives you steady, predictable deductions every month.

For a high-emission car, leasing is almost always better. The £5,100 annual deduction from a lease beats the £1,800 from WDA. And you get it every year, not just for 15 years. Plus, you can upgrade every 2-3 years. Buying locks you into a depreciating asset.

When to Choose Leasing

• You want predictable monthly costs
• You drive a lot and want maintenance included
• You prefer to upgrade cars every 2-3 years
• Your business doesn’t have enough profit to use a large capital allowance in one year
• You’re using a high-emission vehicle

When to Choose Buying

• You’re buying a zero or low-emission vehicle (electric or hybrid)
• You have enough profit to claim the full First-Year Allowance
• You plan to keep the car for 5+ years
• You want to own the asset and sell it later
• You need custom modifications (e.g., signage, tool racks)

Common Mistakes Business Owners Make

Many business owners think buying a car is always better because they "own" it. But ownership doesn’t equal tax savings.

Here are the top three errors:

1. Claiming 100% of the purchase price for a high-emission car. You can’t. Only 6% per year.
2. Forgetting to track personal use. If you use the car for family trips, you need to report BiK-even if you bought it.
3. Not claiming mileage for business trips. If you buy, you can claim 45p per mile. Many don’t bother and end up paying more tax.

Another big one: mixing personal and business accounts. If you pay for a leased car from your personal bank account, HMRC might say it’s not a business expense. Always pay from your business account and keep the invoice in your business records.

What If You’re a Limited Company?

If you run a limited company, the rules shift slightly. You still get the same capital allowances for buying. But leasing payments are fully deductible as a business cost-no emissions cap applies to the company. The emissions limit only affects your personal BiK if you take the car home.

Here’s the twist: if your company owns a car, you can’t claim mileage. You can only claim fuel and maintenance. So if you’re a director using the company car for personal trips, you’ll pay BiK tax on the car’s value. That’s usually more expensive than claiming mileage as a sole trader.

For limited companies, leasing often makes sense because you avoid the BiK headache. The company pays the lease, claims the full deduction, and you don’t have to track personal miles. Just pay the BiK on your payslip. It’s cleaner.

Final Tip: Think Long-Term

Don’t just look at Year 1. Think about the next five years.

If you buy a car now and emissions rules tighten in 2027, you’re stuck with a vehicle that may no longer qualify for generous allowances. Leasing lets you swap it out. You get a newer, greener car every few years-and keep your tax deductions high.

Also, if you’re planning to sell your business, a company-owned car adds to the asset value. A leased car? It’s gone when the contract ends. That’s not always a bad thing-just something to weigh.

There’s no one-size-fits-all answer. But if you’re serious about cutting your tax bill, start with your vehicle’s emissions. Then match your choice-lease or buy-to how much profit you make and how long you plan to keep the car.