Business Car Leasing in The UK

Business car leasing is a popular choice for many small businesses. Whether you need the car to provide services, travel to meetings or other commercial purposes, leasing vehicles can offer numerous operational and financial advantages.

In this article, we take an in-depth look at business car leasing in the UK, including the key benefits, costs involved, eligibility considerations and finance support available.

What is a business car lease?

In simple terms, a business car lease is a financial agreement between the recipient of the vehicle (the lessee) and the leasing provider (the lessor), where the recipient can use the car for business purposes in exchange for monthly “rental” payments.

Business car leasing is a type of vehicle finance that allows you to fund the cars you need for your business, by paying regular instalments rather than a large upfront cost.

While there are various benefits to car leasing, the main reason businesses choose to lease a car is to avoid having to spend the lump sum to purchase a car upfront.

How does a business car leasing agreement work?

The lessor buys vehicles for leasing purposes and earns interest on monthly payments made by the lessee, until the end of the primary leasing period. This is usually when rental payments amount to 75% or more of the car’s value. Most lease agreements begin with an initial deposit.

Depending on the contract, lessees can then end the agreement, sell it on behalf of the leasing company, continue to use it (entering a secondary leasing period where payments are nominal) or upgrade vehicles.

Most car leasing interest rates are fixed and typically range from 4% to 9% APR but rates are based on lease type, business credit scores and lenders’ policies.

What are the different types of car lease agreements?

There are several types of car leases for businesses, and the differentiation is largely down to ownership. Here is a brief overview of the main car leasing options available to UK businesses:

• Finance lease: In this business car leasing option, the vehicle remains the leasing company’s property. You either pay the entire vehicle cost, including interest charges, over an agreed period or pay a lower monthly rental price with a final payment based on the estimated resale value.
• Lease purchase: This lease agreement is for businesses that eventually want to own the vehicle but don’t have the funds upfront. You make periodic monthly instalments before an option to own it with a final balloon payment. Often, lease purchases don’t include maintenance allowances or other benefits.
• Contract purchase: A contract purchase is similar to a lease purchase, but requires a mandatory balloon payment to own the car at the end of the contract, while VAT is only paid on services rather than monthly payments.
• Contract hire: In this long-term finance agreement, businesses make monthly payments until the cost of the vehicle is met but don’t own the car at the contract’s end and have fewer liabilities.

You can also explore fleet leasing agreements if you require multiple business lease cars, which include various benefits, such as low rates, better maintenance packages and other cost-efficiencies of using a single, combined contract.

How is leasing different from buying the car upfront with a business loan?

If you use a business loan to buy a car, you can use the funds to purchase that vehicle outright, meaning you get full control over how you use it. When leasing a vehicle, you don’t technically own it, meaning fewer commitments, which suits businesses without the funds or need to buy a car outright. However, leasing agreements have certain limitations on use, including business branding.

Leasing vs buying: which is right for your business?

Benefits of business car leasing

• Lower upfront costs
• Simplified budgeting and forecasting 
• Easing cash flow by spreading the costs of a business lease car
• No value depreciation concerns (in most leasing agreements)
• Various tax advantages – lease payments are tax deductible and you can claim back VAT in most cases 
• Flexibility at the end of the leasing term
• Access to a wider range of cars beyond your usual affordability range

Benefits of buying business cars upfront

• Outright ownership of the car
• Free to sell the vehicle at any time 
• Complete control of its use and any branding requirements
• Long-term cost-effectiveness – you don’t need to worry about ongoing monthly payments or interest on capital borrowing (unless you’re using a business loan)
• No excess mileage penalties or other charges subject to lessees
• You can still enjoy tax benefits, such as capital allowances in corporation tax

How business finance can support both options

If you’re unsure whether to buy a vehicle or take out a lease, business finance lenders like iwoca can support your needs​. Our flexible business loans offer fast access to funds to cover the cost of a business car purchase, lease deposit costs or initial monthly payments to ease cash flow. 

How to qualify for a car lease for your business

Eligibility requirements for a business lease car

In most cases, when applying for a car lease for business, you’ll need to be a registered sole trader, partnership or limited company operating in the UK, trading for at least one to two years. There are still options for start-ups, but you may need to provide a personal guarantee and/or pay a higher initial deposit.

Common eligibility considerations include the following:

• Business status and proof of ownership 
• Trading history
• Financial stability
• Credit ratings
• Tax details
• Personal guarantor (for car leases for new businesses without commercial credit histories)

Use a business car lease eligibility checker on leasing company sites for the specifics.

What do you need for a business car lease?

Here are the typical things you need to provide during car leasing applications:

• Key business details, ownership information and ID checks
• Proof of trading
• VAT registration
• Recent financial records and bank statements
• Other financial reports, including annual accounts
• Credit files to judge risk levels

If you don’t have a good credit history or long track record, check out our articles on how to build business credit and improve your credit score. 

What are the different costs when leasing a business car?

When leasing a business car, the main costs include an initial deposit, fixed monthly payments, and potential maintenance fees if not covered in the lease. Businesses must also arrange fully comprehensive insurance. Hidden costs may arise from excess mileage charges, early termination fees, or wear-and-tear penalties at the end of the lease. That's why it's important to always review lease terms carefully to understand the total cost and avoid unexpected expenses.

Key cost considerations

When choosing between buying, hiring or leasing a business car and comparing providers, consider the following leasing costs:

• Deposit requirements: Before securing a business car lease, you must put down a deposit. The deposit size depends on the type of car, agreement length, your financial position and the dealer’s discretion. Some leasing companies offer no-deposit deals, which usually means far higher monthly payments.  
• Monthly payments: Businesses make fixed monthly payments for an agreed period, usually between two and four years. The amounts depend on the contract length, your creditworthiness and the business lease car’s value.
• Maintenance fees: While the vehicle remains the leasing company’s property during the agreement, most companies make businesses responsible for vehicle maintenance, including servicing and repair costs. Some deals include a maintenance package, tailored to your needs, for an additional monthly fee.
• Insurance costs: Many business car leases require the lessee to arrange fully comprehensive insurance. Premiums depend on the vehicle, business type and driver history.

Hidden costs to take into account

Unexpected charges can compound the cost-effectiveness of a car lease for business. So, here are some hidden costs to be aware of when choosing a leasing agreement: 

• Excess mileage charges for going over pre-agreed mileage limits
• Early termination fees, if there’s a need to break the lease ahead of time  
• End-of-lease wear-and-tear fees – if there’s been significant damage to the business lease car, you’re liable for additional costs at the end of the contract
• Maintenance costs (if maintenance allowance is exceeded or not included in the lease deal)

Be sure to read the finer points of any car leasing agreement to avoid nasty surprises.

Leveraging tax and VAT benefits of leasing a business car

There are various tax benefits when entering a car leasing agreement, including tax deductions on monthly payments and VAT benefits.

Firstly, business car leasing payments can be claimed as a tax-deductible expense for corporation tax. The amount of tax which can be claimed depends on the car’s CO2 emissions, as determined by allowances set by HMRC. Van leasing is excluded, and businesses can claim 100% regardless of the emissions. 

Secondly, if you’re VAT-registered, you can claim 100% VAT back if the car is used solely for business purposes, and 50% if for both business and personal use.

Also, you can claim tax relief on excess mileage and maintenance costs. However, tax benefits vary according to the lease type, vehicle type and contractual terms, so always check with the provider. 

What happens when your business car lease expires?

When your business car lease expires, you typically have several options. You can renew the lease, upgrade to a newer model, return the vehicle, or, if your contract allows, purchase it outright with a final payment. Some agreements also permit selling the vehicle on behalf of the leasing company.

Options available to businesses at the end of a car leasing agreement

At the end of your lease agreement, your business has several options, depending on the type of car lease chosen. Here are the typical options:

• Renew the lease, to extend the leasing period or include additional business lease cars
• Upgrade to a newer model, with an amended contract to account for valuation changes 
• Sell the vehicle on behalf of the leasing company
• Purchase the vehicle outright (if you’re in a contract that enables ownership) either with a final balloon payment or due to monthly instalments having covered the vehicle’s value

Explore different end-of-lease options before making any decision. 

How can you avoid wear-and-tear penalties or excess mileage charges?

Careful planning helps avoid too many additional fees at the end of your lease. For example, calculate your likely annual mileage, including regular commutes, typical project mileage use and recurring personal use, then allow a buffer for increased demand or unexpected use.

Some wear-and-tear in car leasing (natural deterioration, such as scratches and scuffs on paintwork, bumpers, tyres, etc.) is unavoidable but aim to keep the vehicle regularly cleaned, serviced and driven with care.

Where can you find the best business car lease deals?

Shopping around is key to finding the best business car lease deals. That includes evaluating reputable leasing companies and determining the cost-saving benefits of certain vehicles and contract types.

Comparing the best car leasing deals online

Do your online research, reviewing specialist comparison sites, trusted industry sources and direct lender sites to see their seasonal business car lease deals. Compare upfront and monthly costs, mileage limits, maintenance packages, and other benefits, while checking for restrictions or hidden costs.

Ways to make cost savings on car leasing agreements

Beyond finding a cheap business car lease offer, here are a few cost-saving considerations to help you get the best value for your business:

Benefits of leasing used cars

A used car business lease reduces upfront fees and lowers monthly payments, while still offering the main leasing benefits, such as tax deductions and mileage and maintenance packages. Plus, depreciation on a second-hand car is smaller. 

Seasonal and short-term business car lease options

A short-term business car lease is a good option for small businesses which require vehicles for temporary events or experience seasonal fluctuations. While longer contracts usually reduce monthly costs, committing to a large leasing agreement where you’re not maximising the vehicle’s use isn’t cost-efficient.

Eco-incentives for an electric car business lease

The UK government is keen to incentivise businesses on eco-friendly vehicle use, so leasing hybrid and electric vehicles (EVs) is a wise option. According to the BVRLA, electricity was the most popular fuel type of the new vehicles added to the fleet in Q3 2024, with employee salary sacrifice being the zero-emission transition’s driving force. 

Electric car business lease benefits include lower Benefit-in-Kind (BiK) rates, greater capital allowances for tax relief and exemption from road tax. Businesses can also reclaim 100% of VAT on maintenance costs and access government grants for workplace charge points.

Pooling multiple locations and business lease cars under one contract

Another cost-efficient approach is fleet leasing. Using one contract to cover numerous business lease cars across various locations will save you money and simplify lease management, such as arranging business lease car insurance coverage.

Getting support from business finance lenders

Business finance lenders have the specialist expertise to help you find suitable, cost-efficient car financing solutions and avoid common pitfalls. They can also highlight the benefits of short-term loans or other credit options to help with the lease deposit or initial monthly payments while you manage your cash flow. 

Fund your business car leasing needs with iwoca

iwoca is a leading business loan provider, offering fast and flexible finance solutions for UK SMEs, helping to ease cash flow and empower business growth. 

Our short-term loans can support small business car lease needs, whether you want to cover lease deposit costs or align cash flow with your leasing term. 

You can borrow between £1,000 and £1,000,000 and use loans like a line of credit, drawing down funds when required, and only pay interest on what you use.

Explore our Flexi-Loans to see how we can help you fund your business vehicle needs.

Business car leasing FAQs

Do you get credit checked for a business car lease?

Yes, lease providers carry out credit checks, assessing your company’s financial health to determine its risk level. A personal guarantee is often required for new businesses with minimal credit history.

How does leasing affect your business and personal credit score?

Applying for a business car lease often requires a hard credit inquiry, leaving a footprint on your credit file. However, timely payments ensure the long-term impact is positive, while late payments harm your credit score and future funding chances. If you require a personal guarantee, any defaults will impact your personal credit rating. 

What are the car leasing options for new businesses?

While many leasing companies look for good credit histories, new businesses and start-ups can still get business lease cars, but may need a personal guarantee. However, explore short-term lease options where, in many cases, there’s less onus on credit ratings and you may not have to pay a deposit. 

What is the difference between a lease and a hire purchase?

While a business lease involves monthly rental payments for an agreed period before the option to give the asset back, sell it or move into a secondary leasing period, with a hire purchase you gain ownership once you’ve completed a certain number of instalments.

Learn more about the difference between a finance lease and a hire purchase in our dedicated article. 

Why is business car leasing cheaper than personal leasing?

Business car leases are generally cheaper than personal ones due to the range of business benefits available, including various tax deductions and relief, fleet discounts and reduced financial risk to lenders.

Sources:

• Finance Leasing Explained: An Alternative Solution to Borrowing [iwoca Finance Explained Series]
• Understanding Business Car Loans and Vehicle Financing [iwoca]
• Everything You Need to Know About Car Leasing [What Car]
• Business Car Leasing Explained [Nationwide Vehicle Contracts]
• Compare Deals for Business Car Leasing [Money Super Market]
• HMRC Claim Capital Allowances [Gov.uk]
• Electric Cars Power 2024 Business Leasing [Broker News]

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