Lease, PCP, Hire Purchase or Buy Outright? What Each Does to Your Tax

This is the part almost nobody asks about before signing, and it is the part that changes the tax the most. Two people can buy the identical car, on the identical monthly payment, and get completely different tax relief depending on which piece of paper they signed.

The reason is that for tax purposes there are only two worlds, and the finance method decides which one you are in.

The two worlds: renting it or owning it

If you are renting the car, the monthly rentals are a running cost. You deduct them against profits as you go, and you get no capital allowances because you never owned anything.

If you are buying the car, the purchase is capital. You claim capital allowances on the cost, spread over time, and any interest is deducted separately as a finance cost.

That distinction is what everything below turns on.

Contract hire or leasing — renting

The cleanest treatment, and the reason it is so popular with owner-managed companies.

The rentals come off taxable profits. There is a restriction for dirtier cars: if the car emits more than 50g/km, 15% of the rental is disallowed and you only get relief on 85%. Under 50g/km, which covers every electric car and the better plug-in hybrids, the whole rental is deductible.

On VAT, you can reclaim 50% of the VAT on the finance element. That block is automatic and you cannot improve on it. But it applies only to the finance part — if the agreement separately itemises maintenance or servicing, that VAT is normally recoverable in full. Ask the leasing company to split the invoice.

No capital allowances, no asset on the balance sheet, no disposal to worry about, and no exposure to what the car is worth in three years. You hand it back.

Hire purchase — owning

With HP you are buying the car in instalments and you will own it at the end. For tax you are treated as having bought it outright at the start, once it is brought into use.

So you claim capital allowances on the full cost of the car straight away, not on the payments as you make them. The interest is deducted separately as a finance cost. For a new electric car this is powerful, because of the allowance in the next section.

The catch is VAT. You cannot reclaim the VAT on buying a car. The block is near-total: it only lifts if the car has genuinely no private use at all, which for a director’s car is effectively impossible to sustain. On a £40,000 car that is around £6,700 of VAT gone that a lease would have given you half of.

PCP — and this is the one to be careful with

Personal contract purchase sits between the two, and its tax treatment is not fixed. It depends on the terms of your particular agreement.

The test comes from section 67 of the Capital Allowances Act 2001, and in practice it turns on the optional final payment — the balloon. If that final payment is set below the car’s expected market value at that point, the arrangement looks like a purchase, s.67 applies, and capital allowances are available just as with HP. If it is not, you are in lease territory and there are no capital allowances at all.

This is the trap. Two PCP deals that look identical in the showroom — same car, same deposit, same monthly figure — can be taxed completely differently because of how the balloon was set. And you cannot fix it afterwards.

If you are considering PCP, send us the agreement before you sign it. It takes ten minutes to read and it is the difference between claiming a full allowance on the car and claiming nothing.

Buying outright — and a deadline worth knowing

If the company has the cash, buying outright puts you straight into the capital allowances regime. What you get depends entirely on emissions.

New and unused zero-emission cars get a 100% first-year allowance. The entire cost comes off taxable profits in year one. On a £40,000 electric car that is £40,000 of deduction, worth £10,000 at 25% corporation tax, in the year you buy it.

That allowance is running out. It was extended by only one year at last autumn’s Budget and now applies to expenditure up to 31 March 2027 for companies (5 April 2027 for sole traders and partnerships). That is under seven months away. There may be a further extension, but it has been extended year by year for a while now and nobody should bank on it. If buying an electric car outright is on your plan for the next couple of years, the tax case for doing it sooner is real.

Everything else is much slower. Cars over 50g/km go into the special rate pool at just 6% a year on a reducing balance — you are still claiming relief on that car a decade later. Cars at 50g/km or below get 18%. Neither is anywhere near the 100%.

And one myth worth killing: cars do not qualify for the Annual Investment Allowance, and they do not qualify for full expensing either. Those reliefs cover vans, machinery and equipment, but cars are specifically excluded. We are asked this most weeks. The 100% first-year allowance on new electric cars is a separate, narrower relief, and it is the only route to immediate full relief on a car.

Company or sole trader? It changes things

Worth flagging, because the answer differs and people mix the two up.

In a limited company, the company claims the full capital allowance regardless of private use. The private use is dealt with separately, as a benefit in kind on the director — which is what part two was about.

For a sole trader or partnership, there is no benefit in kind because you are not an employee of yourself. Instead the capital allowance is restricted to the business-use proportion. Use the car 70% for business and you claim 70% of the allowance.

Same car, same finance, quite different sums.

Putting it together

For most of the Kent owner-managed companies we act for, it comes down to this.

Leasing suits you if you want predictable monthly costs, no residual value risk, and the VAT recovery. For an electric car with rentals fully deductible and half the VAT back, it is a strong default.

Hire purchase or a qualifying PCP suits you if you want to own the car and, above all, if it is a new electric car you can buy before the first-year allowance deadline. The 100% deduction can outweigh losing the VAT recovery — but it needs the numbers running, because it genuinely goes either way.

Buying outright makes sense if you have the cash sitting idle and the car is a new EV. Otherwise the 6% and 18% pools are slow enough that financing usually wins on timing alone.

A non-qualifying PCP is the one to avoid walking into unknowingly: no capital allowances, and not structured as a clean lease either.

The honest summary of all three parts is that there is no single right answer — there is a right answer for your mileage, your fuel choice, your tax rate and your company’s cash position. But the gap between the best and worst option on the same car is routinely a few thousand pounds over a contract, and it is decided by paperwork you sign in an afternoon.