Leasing a car through your business can cut your tax bill, protect your cash flow and put you in a new car every few years. It only works well if you choose the right car and the right structure, though. First Vehicle Leasing has arranged business leases for over 25 years. This guide covers how Business Contract Hire works, who qualifies, the 2026/27 BiK rates and what VAT you can reclaim.
Key Takeaways
- Business Contract Hire (BCH) is open to sole traders, partnerships, limited companies and LLPs. Prices are shown excluding VAT.
- In the 2026/27 tax year, fully electric company cars carry a 4% Benefit in Kind (BiK) rate. That rises to 5% in 2027/28 and 9% by 2029/30.
- Petrol and diesel company cars sit between 17% and the 37% cap in 2026/27, depending on CO2 emissions.
- VAT-registered businesses can usually reclaim 50% of the VAT on the rental, and 100% on a maintenance package that's invoiced separately.
- Cars emitting 50g/km CO2 or less avoid HMRC's 15% lease rental restriction on tax relief.
What Is Business Car Leasing and How Does It Work?
Business car leasing, usually called Business Contract Hire (BCH), is a long-term rental. Your business pays a fixed monthly amount to use a brand-new car for a set term, typically two to four years, and then hands it back. The finance company owns the car, so you have nothing to sell at the end.
You pay the gap between what the car costs and its residual value (what it's expected to be worth when the lease ends), plus interest charges. The funder takes the risk on that residual value. If the car is worth less than forecast when you hand it back, that's their problem, not yours.
You set three things: the term, your annual mileage and the initial rental. The initial rental is paid at the start of the agreement and is usually equal to one, three, six, nine or twelve monthly rentals. A bigger initial rental lowers the monthly figure but doesn't reduce the overall cost. You can also add a maintenance package to fix your servicing and tyre costs.
Who Can Lease a Car Through a Business?
Any trading business can apply for Business Contract Hire: sole traders, partnerships, limited companies and limited liability partnerships (LLPs). You don't need to be VAT-registered to lease on BCH, but you do need to be registered to reclaim any VAT. Every application goes through the funder's credit and affordability checks.
Funders look at your business credit file, your filed accounts and often the directors' personal credit. Newer companies, or those with a short trading history, may be asked for a director's guarantee. That's a personal promise to cover the payments if the company can't. FVL is authorised and regulated by the Financial Conduct Authority (FCA) and is a member of the BVRLA, the leasing industry's trade body. Under FCA rules, we have to make sure any agreement suits your circumstances before you sign.
How Much Company Car Tax (BiK) Will I Pay in 2026/27?
If you or your family can use a company car privately, including for commuting, HMRC treats that as a Benefit in Kind (BiK) and charges income tax on it. Under HMRC's published appropriate percentages, a fully electric car is taxed at 4% of its P11D value in 2026/27. Petrol and diesel cars are taxed at 17% to 37%.
The P11D value is the car's list price including VAT, options and delivery, but excluding the first registration fee and Vehicle Excise Duty (VED). A discount on the car doesn't reduce it. BiK applies to directors and employees. Sole traders and partners don't pay BiK on their own car. Instead, they claim only the business share of its costs.
| Vehicle type | BiK rate 2026/27 | Confirmed changes |
|---|---|---|
| Fully electric (0g/km) | 4% | 5% in 2027/28, 7% in 2028/29, 9% in 2029/30 |
| Plug-in hybrid (1–50g/km) | 4% to 16%, depending on electric range | Flat 18% from 2028/29, 19% in 2029/30 |
| Petrol and diesel (51g/km and above) | 17% to 37%, depending on CO2 | Rising by 1 point a year, with the cap reaching 39% by 2029/30 |
How is company car tax calculated?
Multiply the P11D value by the BiK rate to get the taxable benefit, then multiply that by your income tax rate. The employer also pays Class 1A National Insurance of 15% on the taxable benefit. Here's an illustrative example using two cars that each have a £40,000 P11D value:
| Example (£40,000 P11D) | Electric at 4% | Petrol at 31% |
|---|---|---|
| Taxable benefit | £1,600 | £12,400 |
| Annual tax, 20% taxpayer | £320 | £2,480 |
| Annual tax, 40% taxpayer | £640 | £4,960 |
| Employer Class 1A NIC (15%) | £240 | £1,860 |
What about plug-in hybrids?
Plug-in hybrids (PHEVs) emitting 1–50g/km are taxed by electric range: 4% for 130 miles or more, rising to 16% for under 30 miles. Stricter Euro 6e-bis emissions testing raised many PHEVs' official CO2 figures. HMRC's temporary easement treats eligible PHEVs registered between 1 January 2025 and 5 April 2028 as emitting 1g/km. Even so, from 2028/29 every PHEV in that band moves to a flat 18%.
Your rate follows the tax year, not the date you signed. So a four-year lease on an EV that starts now will see its rate go from 4% up to 7% or more before it ends. Plan for that. If you're an employee rather than a business owner, a salary sacrifice scheme is often the most tax-efficient way to drive an EV.
Can My Business Reclaim VAT on a Lease Car?
Usually half of it. Under HMRC's VAT Notice 700/64, a VAT-registered business that makes a leased car available for any private use can reclaim 50% of the VAT on the rental. You can reclaim all of the VAT on a maintenance package that's invoiced separately, and vans used for business are normally fully reclaimable.
The 50% block is a flat rate. It applies whether private use is 5% or 95% of your mileage, and commuting counts as private use. You can only reclaim 100% if the car genuinely isn't available for private use, such as a pool car kept at your premises overnight. HMRC sets a high bar for proving that.
Corporation tax is simpler. Rentals are deducted from profits as a business expense. However, HMRC's BIM47725 guidance disallows 15% of the rental for cars emitting over 50g/km. Electric cars qualify for the full deduction. Leased cars don't qualify for first-year capital allowances, which apply only to cars you buy.
Will I be approved?
Five questions, no sign-up, and an honest answer before you apply for anything.
Check my eligibilityIs a Business Lease Cheaper Than a Personal Lease?
Often, yes, if your business is VAT-registered. BCH rentals are quoted excluding VAT, the business can usually recover half of that VAT, and the rental reduces taxable profit. Personal Contract Hire (PCH) prices include 20% VAT and are paid from income you've already been taxed on. The catch is BiK: on a high-emission car, the BiK bill can wipe out that saving.
| Feature | Business Contract Hire | Personal Contract Hire |
|---|---|---|
| Who signs | Your business | You, as an individual |
| Advertised price | Excludes VAT | Includes VAT |
| VAT recovery | Usually 50% of the rental VAT if VAT-registered | None |
| Tax relief on rentals | Yes (15% disallowed over 50g/km) | None |
| BiK for directors or employees | Yes, if the car is used privately | No |
| Best suited to | Electric cars and VAT-registered businesses | Higher-emission cars driven mostly privately |
Why Can Leasing Through a Broker Beat Buying?
We commit to manufacturers in volume, so the car starts at a lower cost than a single business could negotiate. The residual value, though, is forecast from the car's expected market value, not from what the funder paid. The gap you fund shrinks, and so does the amount the interest is charged on.
The strongest value is in the models we've bought in depth, so work out what you need and what you can spend before you settle on one model. Leasing isn't automatically cheaper for everyone. If you keep cars for many years, buying can work out better.
Which Cars Make the Most Sense as a Business Lease in 2026?
For most directors and employees, a fully electric car makes the strongest case in 2026. It carries 4% BiK, qualifies for the full corporation tax deduction on rentals and costs nothing under the lease rental restriction. Petrol, diesel and self-charging hybrids are taxed on CO2 emissions, so they still make sense mainly where the car is rarely used privately.
The Tesla Model 3 remains a popular business choice. If you want an SUV, the Skoda Elroq and Kia EV3 keep the P11D value, and so the BiK bill, down. High-mileage drivers should look at long-range saloons such as the Volkswagen ID.7 or BMW i4. Keep the list price under £50,000 if you can, because above that the VED expensive car supplement applies to EVs too. You can compare more options on our electric car leasing page.
Pickups have changed too. Since April 2025, HMRC treats double-cab pickups with a payload of one tonne or more as cars for BiK. That ends the flat-rate van benefit for new agreements. For a tradesperson who needs the load bed, the Ford Ranger still makes sense, but check the BiK figure first.
How Do You Get a Business Car Lease With FVL?
Getting a business lease with us takes five steps: check your eligibility, choose a car, set the contract terms, complete the credit application and take delivery. Most of it happens by phone and email. Our team can run a free eligibility check before any application, so you'll know where you stand first.
- Check eligibility: tell us your business type, how long you've been trading and whether you're VAT-registered.
- Choose your car: start from your budget and what you need, then compare BiK rates as well as rentals.
- Set the terms: term length, annual mileage, initial rental and whether to add maintenance.
- Apply: have your accounts, bank details and director information ready.
- Take delivery: once you're approved and have signed, the car is delivered free to your chosen address.
Is Business Leasing Right for You?
Based on our experience, a business lease tends to suit you if:
- you're a limited company director happy to drive an electric car
- your business is VAT-registered and profitable enough to use the tax relief
- you want fixed costs and a new car every two to four years.
Think twice if you want a high-emission petrol or diesel as a higher-rate taxpayer. A personal lease plus HMRC's mileage allowance may cost you less. Buying may suit you better if you keep cars for six years or more. Our business leasing guides cover each scenario in more depth.
Cars in this article
Related guides
Business Car Leasing (BCH) ExplainedPersonal vs Business Lease: Which Is Right for You?Business Van Leasing Explained: Tax, VAT and CostsCan I Buy My Car at the End of the Lease?View all guidesFrequently Asked Questions
Ready to Lease Through Your Business?
Our business leasing specialists at First Vehicle Leasing can check your eligibility, compare BiK across shortlisted cars and find the right funder. Call us on 0333 003 3325 or browse the latest offers.
Sources
- Work out the appropriate percentage for company car benefits (480: Appendix 2) - HMRC, GOV.UK
- Motoring expenses (VAT Notice 700/64) - HMRC, GOV.UK
- BIM47725: Restriction of hiring costs for cars - HMRC, GOV.UK
Written by Andy Bell, First Vehicle Leasing.
