Buying vs Leasing a Car Through Your Limited Company: Pros and Cons

As a UK limited company owner, you may be considering buying or leasing a company car. Each option has financial, tax, and cash flow implications that can impact your business. In this post, we’ll explore the advantages and disadvantages of both buying and leasing a vehicle through your company to help you make an informed decision.

Buying a Car Through Your Limited Company

Advantages of Buying

1. Full Ownership – The car belongs to the company, meaning you have an asset that can be sold later.

2. Tax Relief on Capital Allowances. If the car is brand new and fully electric, you can claim 100% first-year allowances (FYA), reducing corporation tax.

For petrol and diesel cars, tax relief depends on CO₂ emissions.

3. No Mileage Restrictions – Unlike leasing, there are no penalties for exceeding a set mileage limit.

4. Potential VAT Reclaim – If the car is used exclusively for business, VAT can be reclaimed (rare for company cars, as personal use often applies).

Disadvantages of Buying

1. High Upfront Costs – A large capital outlay is required, affecting cash flow.

2.Depreciation – The car loses value over time, reducing its resale price.

3.Benefit-in-Kind (BIK) Tax – if the car is available for personal use, the director will pay BIK tax based on CO₂ emissions and list price. BIK rates are much lower for electric cars (currently 2% until 2025).

4.Ongoing Maintenance & Repairs – The company is responsible for all upkeep costs.

Leasing a Car Through Your Limited Company

Advantages of Leasing

1. Lower Initial Cost – Monthly lease payments improve cash flow compared to buying outright.
2. Fixed Monthly Payments – Easier to budget with predictable costs.
3. Tax Deductible Expenses – lease payments are tax-deductible if the car is used for business. However, if CO₂ emissions exceed 50g/km, only 85% of lease costs are deductible.
4. VAT Reclaim – if the car is used only for business, you can reclaim 100% VAT.If there’s any private use, you can still reclaim 50% of the VAT on lease payments.
5. No Depreciation – at the end of the lease, you return the car and can upgrade to a newer model.

Disadvantages of Leasing

1. You Never Own the Car – There’s no asset to sell at the end of the lease.
2. Mileage Limits Apply – Exceeding the agreed mileage can result in costly penalties.
3. Long-Term Commitment – If your business circumstances change, ending the lease early may incur fees.
4. BIK Tax Still Applies – Even though you don’t own the car, a leased vehicle available for personal use is still subject to BIK tax.

Example – Buying vs Leasing an Electric Car

Emma runs a successful consultancy business and wants a company car for both business and personal use. She’s considering a Tesla Model Y (list price: £45,000).

Option 1: Buying the Tesla

• As the car is fully electric, Emma’s company can claim 100% first-year allowances, reducing taxable profits by £45,000 in year one.
• She avoids mileage restrictions, making it ideal for long-distance client meetings.
• However, she’ll have BIK tax to pay, though at just 2%, it’s far lower than for petrol/diesel cars.
• Maintenance costs are low, but depreciation means the car will lose value over time.

Option 2: Leasing the Tesla

• A 3-year lease costs around £700 per month (£8,400 per year).
• The lease payments are fully tax-deductible, reducing corporation tax.
• VAT can be reclaimed (50% for personal use).
• Emma can switch to a newer model after 3 years, but she must stay within the mileage limit to avoid penalties.

What’s Emma’s decision? Emma opts to buy the Tesla because of the 100% capital allowance, lower long-term costs, and flexibility to keep the car as long as she wants. However, if cash flow were tighter, she might have chosen leasing.

Which Option is Best?

• If cash flow is a priority, leasing offers lower initial costs and predictable expenses.
• If you want a company asset and are considering a tax-efficient electric car, buying may be the better choice.
• For high-mileage drivers, buying avoids excess mileage penalties.
• If you prefer changing cars regularly, leasing may be more convenient.

💡 Tip: If you’re unsure which option is best for you, speak to your accountant (that’s me!) for tailored advice based on your company’s financial situation and tax position.

Need help deciding? Get in touch, and let’s run the numbers!