Leasing a car through your limited company

Leasing a car through your limited company can be a tax-efficient way to run a vehicle, particularly if you choose an electric model; your company can claim Corporation Tax relief on the lease payments and often reclaim part of the VAT.

However, as a limited company director, the main thing to be aware of is company car tax.

For directors and employees, the car’s CO2 emissions can make a huge difference to your personal tax bill, which is why electric and low-emission cars are often much more attractive through a limited company.

In this guide, Ricky Whitfield, co-founder of Accrue Accounting, explains more.

How does company car leasing work?

If you lease a vehicle through your company, the business signs the agreement and pays the monthly rentals, rather than you paying for the car personally.

Most leases start with a larger initial payment, followed by fixed monthly rentals over two, three or four years. With a typical contract hire agreement, you simply hand the vehicle back at the end of the term.

The company can usually claim the lease payments as a business expense, although the amount it can deduct for Corporation Tax is dependent on the vehicle’s CO2 emissions.

If, instead, you buy a car through your limited company, the company owns the vehicle and claims tax relief via capital allowances.

Corporation Tax relief on the lease payments

For cars emitting 50g/km of CO2 or less, the company can usually deduct the full qualifying lease cost when calculating its Corporation Tax bill.

If emissions are higher than 50g/km, 15% of the qualifying rental is disallowed for tax purposes, so the company gets relief on 85% of the cost.

Electric and very low-emission cars therefore tend to get the more favourable treatment.

Can your company reclaim the VAT?

If the company is VAT registered, it can normally recover 50% of the VAT on the rental where the car is also made available for private use.

HMRC applies a flat 50% restriction, so you don’t need to apportion each journey between business and private use.

You can recover full VAT only if the car is used exclusively for business and is not available for private use in any way, including commuting. Obviously, this won’t apply to the vast majority of company directors!

Your company can normally recover VAT on maintenance costs too, if they’re listed as a separate charge and all other VAT conditions are met.

The Benefit in Kind is usually the deciding factor

If the company car is available for private use (including ordinary commuting), this usually triggers a Benefit in Kind charge.

The charge is based on the car’s official list price plus any taxable accessories, with a percentage largely based on the car’s CO2 emissions.

With some plug-in hybrids, the electric-only range is also included in the calculation, while certain diesel cars that do not meet the RDE2 standard are punished by an extra four percentage points, up to the 37% maximum.

It may be possible to reduce the taxable value, including when the employee contributes to the cost of the car or pays the company a sum for private use.

For this reason, two cars with very similar monthly lease payments may result in very different BiK charges for the director/employee.

Electric cars remain tax-efficient

For a fully electric company car, the 2026/27 BIK percentage is 4%. It is scheduled to rise to 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30, so it is worth considering the tax bill across the whole lease rather than just its first year.

Take an electric car with a £50,000 list price:

£50,000 × 4% = £2,000 taxable benefit

A 20% taxpayer would pay £400 tax on that benefit, and a 40% taxpayer would pay £800.

The personal tax cost will be different if you live in Scotland.

The company also has to pay Class 1A National Insurance on the benefit. In the 2026/27 tax year, a £2,000 benefit @ 15% creates a £300 Class 1A liability.

The BiK calculation is the same, regardless of the monthly lease amount. You can read more in our guide to electric cars for limited company contractors.

Petrol and diesel cars cost considerably more

For higher-emission petrol and diesel cars, the BiK percentage can be much higher, up to 37% for the most polluting vehicles.

If you lease a £50,000 car at 35%, the taxable benefit works out at £17,500 per year!

If you’re a higher rate taxpayer (40%), you’ll have to pay an extra £7,000 in income tax.

The company also has to pay £2,625 in Class 1A National Insurance.

The company still benefits from tax relief on most of the lease cost, but as the example shows, the amount of additional tax can quickly outweigh much of the benefit.

For this reason, using your own car and claiming business mileage can sometimes be the better option, particularly if you prefer a petrol or diesel model. For more, read our guide which compares company cars with using your own vehicle.

What if the company pays for your private fuel?

If your company also pays for your private fuel, this can make an already expensive company car even more costly.

If the company pays for your private petrol or diesel and you do not repay the full cost, this creates a separate fuel benefit cost.

For 2026/27, the fuel benefit multiplier is £29,200, and HMRC applies the same percentage as the car itself.

For a car with a 30% BIK percentage:

£29,200 × 30% = £8,760

That is a taxable fuel benefit of £8,760, even if the company spent only a few hundred pounds on your private fuel. For most owner-managed companies, it is simpler and cheaper for the director to pay for private fuel personally.

This fuel benefit charge does not apply to electricity used to charge a fully electric company car, as HMRC does not treat electricity as fuel for these rules.

What other costs can the company pay?

If the company leases the car, it can usually pay the day-to-day running costs as well, including insurance, servicing, repairs, and Vehicle Excise Duty, unless the lease already includes these.

Fuel and charging costs are a little different, because the tax treatment depends on whether the journey is for business or private use.

For a fully electric company car, your company can pay for charging directly or reimburse you for electricity used to charge it at home or at a public charging point, without creating a separate taxable benefit.

The company must be able to show that any reimbursement relates to the company car, not other household electricity costs.

If you pay for electricity yourself and claim it back for business journeys, HMRC’s advisory electric rates from 1 September 2026 are 7p per mile for home charging and 15p per mile for public charging.

You can use a higher rate where you can demonstrate that the actual cost per mile was higher. These advisory rates are for fully electric company cars, rather than hybrids.

When comparing deals, it’s also worth looking beyond the monthly rental. Excess mileage charges can add up quickly, and early lease termination can be expensive if your circumstances change.

Can you still claim mileage in a company car?

No, Approved Mileage Allowance Payments are designed for people who use their own vehicles for business journeys.

If you personally pay for fuel on business journeys in a company car, the company can reimburse you according to the latest HMRC advisory fuel rates.

The journey itself must also qualify as legitimate business travel, subject to the temporary workplace rules.

You can read more in our guide to business travel expenses.

Leasing versus buying through the company

Leasing gives the company a predictable monthly cost without a large upfront payment. For VAT-registered companies, you can also recover some VAT on lease payments.

If your company owns the car, it can claim tax relief via capital allowances rather than deducting monthly rentals.

New, unused zero-emission cars currently qualify for a 100% first-year capital allowance, allowing the company to deduct the full qualifying cost in the year of purchase.

A second-hand electric car does not qualify for that 100% allowance. Instead, the company normally claims writing-down allowances at the main rate of 14% a year on a reducing balance, which also applies to new or used cars emitting 50g/km of CO2 or less that do not qualify for the first-year allowance.

Cars above 50g/km normally fall into the special-rate pool, with allowances at 6% a year. These percentages determine how much of the remaining qualifying cost the company can deduct each year, rather than reducing the car’s purchase price.

Which works out better depends on the car, its CO2 emissions, the lease terms, and, if you buy it, what the car is likely to be worth when you eventually sell it.

Try our company car tax calculator to help you compare the personal tax cost of different vehicles.

Should you lease a car through your limited company?

If you’re considering an electric car, leasing it through your company can still be very tax-efficient in 2026/27. The company receives tax relief on the rental payments; a VAT-registered business can usually recover some of the VAT. The 4% BIK rate keeps your personal tax charge low in 2026/27.

The same doesn’t necessarily apply if you lease a petrol or diesel car, with higher BIK percentages, the 15% lease restriction above 50g/km, and, potentially, a private fuel benefit. These elements can wipe out most, if not all, of the apparent savings.

If you have any questions about the most tax-efficient way to use a car through your company, speak to your accountant first. They can calculate the real cost to you and your company of the various options.