Lease or buy? How company cars and vans are taxed

This guide covers UK business taxation: Corporation Tax for companies and Income Tax for sole traders and partnerships. Every rule links to the HMRC manual, GOV.UK page or legislation that sets it, checked on 12 November 2026. It is not tax advice: the right answer for a business depends on its profits, accounting period, structure and vehicle use, and an adviser should check any decision.

The short answer

• Buying a new zero-emission car: 100% first-year allowance, but only for spending by 31 March 2027 (Corporation Tax) or 5 April 2027 (Income Tax). That is the end date in section 45D of the Capital Allowances Act 2001. No Budget 2026 document THRIVE read extends it. After that date, a new electric car falls into the main pool at the writing-down rate.
• Buying any other car: no up-front allowance. Cars do not qualify for the annual investment allowance, full expensing or the 40% first-year allowance. Cars at 50g/km or less go in the main pool at 14% a year; cars over 50g/km go in the special rate pool at 6%.
• The main pool rate falls to 12% from 1 April 2027 (Corporation Tax) and 6 April 2027 (Income Tax), and the main rate first-year allowance rises from 40% to 50% for spending from 1 January 2027, under a Budget 2026 measure announced for Finance Bill 2026-27 and not yet law. Special rate stays at 6%.
• Buying a van: up to 100% relief in year one. A van is not a car for capital allowances. A company can claim full expensing on a new van; a company, sole trader or partnership of individuals can use the £1 million annual investment allowance.
• Leasing a car over 50g/km: 15% of the rental is disallowed. Electric cars and cars at 50g/km or less escape the restriction. It never applies to vans.
• VAT: purchase VAT on a car available for private use is blocked. On a leased car, 50% of the VAT is normally blocked, with full recovery where the car is used exclusively for business. VAT on a van follows the normal rules: recoverable for business use, with only the business share claimable if there is personal use.
• On THRIVE's worked example, tax relief in the end tracks the net cost either way. What changes is timing, irrecoverable VAT and, for higher-emission cars, the 15% restriction. The workings are below.

Buying a car: capital allowances

For capital allowances a car is a road vehicle other than a motorcycle, a vehicle "of a construction primarily suited for the conveyance of goods or burden of any description", or a vehicle not commonly used privately and unsuitable for it (CAA 2001, section 268A). Cars cannot take the annual investment allowance, full expensing, the 50% special rate first-year allowance or the 40% main rate first-year allowance (HMRC Capital Allowances Manual CA23153; CAA 2001, section 46, general exclusion 2). What a car gets depends on its CO2 figure and whether it is new.

Car bought from April 2021	Treatment	Rate
New and unused, 0g/km or electric	100% first-year allowance, to 31 March 2027 (CT) or 5 April 2027 (IT)	100%
Second-hand electric, or new or used at 50g/km or less	Main rate pool	14%, then 12% from April 2027
New or used over 50g/km	Special rate pool	6%

Sources: GOV.UK, Capital allowances: business cars; the 50g/km test is in CAA 2001, section 104AA. A car with no emissions figure goes in the special rate pool unless it was registered before 1 March 2001. Cars cannot be treated as short life assets, and sole traders and partners put a car with private use in a single asset pool.

Both pools work on a reducing balance: each year's allowance is the rate times what is left in the pool. The main rate fell from 18% to 14% on 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.

The 100% allowance for zero-emission cars

Section 45D gives a 100% first-year allowance on a car that is "unused and not second-hand", first registered on or after 17 April 2002, and either electrically propelled or with CO2 emissions that do not exceed 0g/km. HMRC's manual adds that a hybrid car will not qualify, and that a car driven a limited number of miles, or pre-registered to a dealer, can still count as unused.

The last Budget to touch this allowance was the Autumn Budget 2025, which extended it and the chargepoint allowance by one year. Finance Act 2026 wrote the current end dates into section 45D(1B).

Does the 100% first-year allowance for electric cars continue after March 2027?

Not on current law. The 100% first-year allowance for new zero-emission cars, and the matching 100% allowance for electric vehicle chargepoints in section 45EA, both end on 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax. Budget 2026 on 28 October 2026 did not extend either one. The Budget 2026 tax documents contain no measure on them, and the only first-year allowance change in the Overview of Tax Legislation and Rates (paragraph 1.42) is the main rate increase to 50%, which excludes cars.

Two qualifications. The Treasury "may by regulations amend subsection (1B) so as to extend the relevant period" (section 45D(1C)), so an extension does not need a Finance Act. And THRIVE could not confirm what happens to chargepoint spending after the end date; it would fall back to the general plant and machinery rules, but no HMRC page we read says whether it is main or special rate expenditure.

From 1 April 2027, on current law, a new electric car bought by a company goes into the main pool at 12%. It is a main rate car under section 104AA, and cars are excluded from the 50% first-year allowance.

Buying a van: capital allowances

A van is plant and machinery, not a car. GOV.UK says lorries, vans and trucks don't count as cars and points to the annual investment allowance and first-year allowances instead. The routes for a new van:

Allowance	Who can claim	Rate and limit
Full expensing	Companies only, new and unused assets	100% of main rate spending, no cap
Annual investment allowance	Companies, sole traders, partnerships of individuals; new or used	100%, up to £1 million a year
Main rate first-year allowance	Any business, including for leasing; new and unused	40%, rising to 50% from 1 January 2027
Main pool	Anyone, for spending not relieved above	14%, then 12% from April 2027

Sources: full expensing in CAA 2001, section 45S, which has no end date, and GOV.UK: "Only companies can claim full expensing and the 50% first-year allowance." The AIA maximum is £1,000,000 under section 51A, and GOV.UK says AIA is only available for partnerships where all the members are individuals. The 40% allowance is in section 45U for spending from 1 January 2026. The 50% allowance GOV.UK names alongside full expensing is the companies-only allowance for special rate spending, at 50% under section 52. It is separate from the main rate allowance that rises to 50% in January 2027.

Selling a van that was fully expensed brings a balancing charge equal to the whole sale price. HMRC's manual says that where full expensing covered the full cost, "the balancing charge will be the whole of the disposal value", in the period of sale (CA23174AD).

Zero-emission vans

There is no longer a separate 100% allowance for zero-emission goods vehicles. Section 45DA still appears in the 100% row of the section 52 table, but it applies only to spending "in the period of 15 years beginning with" 1 April 2010 (Corporation Tax) or 6 April 2010 (Income Tax) (section 45DA). THRIVE reads that as ending on 31 March 2025 and 5 April 2025. The section allows an extension by Treasury order, and legislation.gov.uk shows none. In practice an electric van gets the same full expensing or AIA as a diesel one. Our electric van buying guide covers the purchase itself.

Pick-ups

For hiring costs, HMRC no longer treats double-cab pick-ups with a payload of one tonne or more as outside the definition of a car: "most, if not all, double cab pick-ups will be treated as a car", for spending from 1 October 2025 at the latest (BIM47730). The same change applies for capital allowances to spending from 1 April 2025 (Corporation Tax) or 6 April 2025 (Income Tax), with a transitional rule for contracts made before those dates where the spending falls before 1 October 2025 (CA23511). So a double-cab pick-up bought now is, in most cases, a car: no AIA or full expensing. VAT uses its own test, and Notice 700/64 still lists a vehicle with a payload of one tonne or more as not a car. Check a pick-up's status with your adviser.

Leasing a car: the 15% restriction

Where a business deducts the cost of hiring a car, the deduction "is reduced by 15%" (Corporation Tax Act 2009, section 56, with a matching Income Tax rule in ITTOIA 2005). It does not apply to:

• a car that is electrically propelled
• a car with low CO2 emissions, which means 50g/km or less (section 104AA)
• a car first registered before 1 March 2001
• a "qualifying hire car": a car on hire purchase with no purchase option or an option at no more than 1% of the new retail price, or on a long funding lease (section 57)
• a car hired for not more than 45 consecutive days, or a car hired in and then let out for more than 45 consecutive days (BIM47750)

The 50g/km threshold applies to hire periods from 1 April 2021 for Corporation Tax and 6 April 2021 for Income Tax (BIM47714). Vans are outside it altogether: the restriction's definition of a car excludes vehicles "primarily suited for the conveyance of goods" (BIM47730). Rebates of restricted rentals are cut by 15% too. HMRC says the restriction does not apply to businesses using the cash basis.

Contract hire, finance lease and hire purchase

Structure	Who claims capital allowances	What the user deducts
Contract hire or operating lease	The leasing company, as owner	Rentals, subject to the 15% rule for cars over 50g/km
Finance lease of 7 years or less	The leasing company	Lease costs, subject to the 15% rule for cars over 50g/km
Long funding lease (a funding lease over 7 years)	The lessee	Not restricted: a qualifying hire car
Hire purchase with an option to buy	The buyer, from when the vehicle is brought into use	Interest; capital through allowances

Sources: a lease of "7 years or less is a short lease" (CAA 2001, section 70I). Under a long funding lease the plant or machinery "is to be treated as owned by him at any time when he is the lessee" (section 70A). Under hire purchase, the buyer is treated as the owner "at any time when he is entitled to the benefit of the contract", and as having incurred all the capital expenditure when the asset is brought into use (section 67). Section 67 has a further test for contracts that accounting standards treat as a lease, so check the accounting treatment of a hire purchase contract with your adviser. GOV.UK confirms items on hire purchase can qualify for AIA, on the capital element only. A typical two to five year vehicle lease is a short lease, so the leasing company claims the allowances. A car on hire purchase with an option above 1% of the new price is not a qualifying hire car, but the buyer then claims allowances as owner rather than deducting hire charges.

VAT on buying and leasing

Buying

VAT on a car "made available for private use is not deductible input tax", unless the car is mainly for taxi work, self-drive hire or driving tuition (BIM31545). "A car is available for private use when there's nothing preventing you or your employee from using the car" (VAT Notice 700/64, section 3.6), and personal use "includes travelling between home and work, unless it's a temporary place of work" (GOV.UK). The 1992 Order also allows full recovery where the business intends to use the car exclusively for business, which a car available for private use fails (article 7(2E) and (2G)). A typical company car with a driver who takes it home is blocked. Blocked VAT becomes part of the cost: "For capital allowances purposes the cost of the car should include the VAT" (BIM31545). When a blocked car is sold, the sale is exempt and no VAT is charged.

Vans are outside the car definition for VAT. Notice 700/64 lists vehicles that are not cars, including "vehicles with a payload of one tonne or more" and "vehicles of not less than 3 tonnes unladen weight" (section 2.2). VAT on a van then follows the normal rules. GOV.UK says you "might be able to reclaim all the VAT on a new car or commercial vehicle if you use it only for business", and that if items "are also for personal use, you can only claim the business proportion of the VAT" (GOV.UK, Reclaim VAT on business expenses). If you recovered VAT on a van, you charge VAT on the full price when you sell it (section 7.4).

Can you reclaim VAT on a leased company car?

Usually half of it. If you lease a qualifying car for business, "you cannot normally recover 50% of the VAT charged", and "The 50% block is to cover the private use of the car" (VAT Notice 700/64, section 4.2). You can reclaim the other 50% under the normal rules. The law gives full recovery where the lessee intends to use the car exclusively for its business, or primarily for carrying passengers with a driver, self-drive hire or driving instruction (VAT (Input Tax) Order 1992, article 7(2E) and (2F)). Exclusive use fails if the car is made available to anyone for private use (article 7(2G)).

• Maintenance: on a lease invoice that splits the finance charge from the service charge, "the VAT due on the finance charge is the amount that is potentially subject to the 50% input tax restriction" (VIT53300). Optional services such as maintenance fall outside the block only if they are supplied and identified separately from the leasing on the invoice (Notice 700/64, section 4.5).
• Short hire: HMRC accepts that a car hired specifically for business for no more than 10 days escapes the 50% block, but a car hired to replace an off-the-road company car is blocked from the first day (section 4.4).
• Vans: the 50% block applies only to cars. VAT on van rentals is recoverable for business use under the normal rules.
• Irrecoverable VAT is part of the expense. HMRC's manual, discussing partly exempt traders, says "the relevant expenditure is inclusive of any input tax which is not claimable" (BIM31540). THRIVE applies the same principle to the blocked half of the lease VAT, treating it as part of the deductible rental.

Worked example: buying against leasing over four years

This is an illustrative example by THRIVE, not advice and not a quote. The prices and rentals are round assumptions chosen to show the arithmetic, not market rates; use your own figures.

Assumptions:

• A company paying Corporation Tax at 25% throughout. The main rate is 25% for profits over £250,000 for financial years 2025 and 2026; later years assume no change.
• Accounting years run 1 April to 31 March, so the 12% rate applies cleanly from the year starting 1 April 2027, with no hybrid rate.
• The company is fully VAT-registered and makes no exempt supplies.
• Car: a new zero-emission car, £40,000 plus £8,000 VAT, provided to an employee who uses it privately, so purchase VAT is blocked. Or leased on contract hire for 48 months at £600 a month plus £120 VAT, finance only.
• Van: a new diesel van, £35,000 plus £7,000 VAT, used only for business, so VAT is recovered in full. Or leased for 48 months at £450 a month plus £90 VAT.
• Sale at the end of four years for an assumed £20,000 (car) and £12,000 (van). The pools hold nothing else.
• Fuel, insurance, maintenance, interest and the time value of money are left out.

The car

Bought by 31 March 2027: the 100% first-year allowance on £48,000, including the blocked VAT, gives £48,000 of relief in year one, worth £12,000 at 25%. Selling for £20,000 with an empty pool brings a £20,000 balancing charge, costing £5,000. Net relief: £7,000, which is 25% of the £28,000 net cost.

Bought from 1 April 2027, on current law: £48,000 into the main pool at 12% reducing balance.

Year to 31 March	Allowance (12%)	Pool left	Tax saved at 25%
2028	£5,760.00	£42,240.00	£1,440.00
2029	£5,068.80	£37,171.20	£1,267.20
2030	£4,460.54	£32,710.66	£1,115.14
2031	£3,925.28	£28,785.38	£981.32
Four years	£19,214.62		£4,803.66

The table assumes the sale falls just after year four, in the year to 31 March 2032; a sale inside year four would change that year's allowance. Selling for £20,000 takes the pool down to £8,785.38 with no balancing charge, and that balance keeps attracting 12% a year. Relief on the car's net cost comes years later than under the 100% allowance.

Leased: the company recovers 50% of the £120 VAT, so £60 a month is blocked and deductible. The deductible cost is £660 a month, £31,680 over 48 months, worth £7,920 at 25%, spread evenly. No 15% restriction applies because the car is electric. A petrol or diesel car over 50g/km on the same rental would have £99 a month disallowed (15% of £660), cutting the deduction to £26,928 and the tax saved to £6,732.

The van

Bought: full expensing on £35,000 gives £8,750 of tax saved in year one. Selling for £12,000 brings a £12,000 balancing charge, costing £3,000. Net relief: £5,750, which is 25% of the £23,000 net cost. A sole trader could take the same 100% deduction through the AIA, at their own Income Tax rates.

Leased: the £90 VAT a month is recovered in full, and van rentals face no restriction. The deduction is £450 a month, £21,600 over 48 months, worth £5,400 at 25%.

What the example shows

On these assumptions	Cost relieved	Tax saved	When
Car bought by March 2027	£28,000 net	£7,000	£12,000 in year one, £5,000 back at sale
Car bought from April 2027	£19,214.62 so far	£4,803.66	Spread; the rest after year four
Car leased	£31,680	£7,920	Evenly over four years
Van bought	£23,000 net	£5,750	£8,750 in year one, £3,000 back at sale
Van leased	£21,600	£5,400	Evenly over four years

THRIVE's reading: in each case the tax system relieves roughly 25% of what the vehicle actually costs the business. Leasing is not more tax-efficient in itself; its rentals are deductible because they are the whole cost. The tax differences sit in three places. First, timing: the 100% car allowance and full expensing put relief in year one. Second, VAT on cars: half the lease VAT is lost on a car with private use, and all the purchase VAT. Third, the 15% restriction on higher-emission cars. The end of the zero-emission car allowance on 31 March 2027 moves a purchased electric car from the first pattern to the slowest one. For running costs beyond tax, see THRIVE's electric and diesel van break-even data.

Who claims the capital allowances on a leased vehicle?

On contract hire and short finance leases the leasing company claims, because it owns the vehicle and the lease is 7 years or less. On hire purchase and long funding leases the customer claims. For leasing companies, the allowances available are narrower than for a business buying its own vehicles:

• No 100% allowance on zero-emission cars bought to lease. First-year allowances exclude spending "on the provision of plant or machinery for leasing" (CAA 2001, section 46, general exclusion 6). The law disapplies the car exclusion for section 45D but not the leasing exclusion. A lessor's new electric car goes in the main pool at 14%, then 12%, while a fleet buying the same car outright before 1 April 2027 gets 100%.
• No full expensing on vans for leasing. The same leasing exclusion applies. The exception is an excluded lease of background plant or machinery for a building (section 46(4A); CA23113).
• The 40% allowance, rising to 50%, is open to leasing. Budget 2025 introduced it so that "the leasing sector, which is currently excluded" could "benefit from some accelerated relief" (HMRC policy paper). The lessee must use the asset wholly or almost wholly to earn taxable income, or be UK resident and not use it significantly for untaxed foreign income (CA23195B). Cars and second-hand assets are excluded (CA23195A). On a £35,000 van bought on or after 1 January 2027, that is £17,500 in year one, with £17,500 going into the main pool at 12% (£2,100 the next year), on the arithmetic of the rates.
• The AIA is not barred by leasing. Its general exclusions cover cars but not leasing in general (section 38B). It is capped at £1 million a year, which a fleet lessor will use up quickly.
• The 12% main rate reaches cars at 50g/km or less. These sit in the main pool, so cutting the rate from 14% to 12% from 1 April 2027 slows a lessor's relief on existing and new electric cars alike. HMRC's Budget 2026 paper names businesses investing in plant or machinery for leasing among those that gain from the higher up-front allowance, but that allowance does not reach cars.
• Lease and leaseback. For spending from 28 October 2026, a separate Budget 2026 measure amends the anti-avoidance rule in section 228G for "Businesses using lease and leaseback arrangements for plant and machinery". It does not affect ordinary contract hire.

THRIVE's reading, not a rule: these allowances shape lessors' pricing. Faster relief on vans from January 2027 and slower relief on cars from April 2027 both feed into rentals, but how much depends on each lessor's tax position, and THRIVE has no rental data to measure it.

The employee side, in brief

How the business is taxed is separate from how the driver is taxed. THRIVE's company car tax data sets out the appropriate percentages, and our explainer on BiK rates covers the 2030/31 rise, when every band rises by one point and zero-emission cars go from 9% to 10%.

For vans, the flat van benefit charge is £4,170 and the van fuel benefit charge £798, and a zero-emission van is reported at 0% of £4,170, which is £0. From 6 April 2027 they rise to £4,310 and £825 (OOTLAR paragraph 2.6). Our guide to company van tax explains when the charge applies. From 6 April 2027, company car and van benefits must also be payrolled (OOTLAR paragraph 1.24). Electric cars face pay-per-mile duty from April 2028, covered in our eVED guide for fleets and leasing companies. Salary sacrifice is in THRIVE's salary sacrifice data.

Key dates

Date	Change	Status
28 October 2026	Lease and leaseback change to section 228G takes effect for spending	Announced; Finance Bill 2026-27
1 January 2027	Main rate first-year allowance rises from 40% to 50%	Announced; Finance Bill 2026-27
31 March 2027 (CT), 5 April 2027 (IT)	100% allowance for new zero-emission cars and chargepoints ends	In law; no extension announced
1 April 2027 (CT), 6 April 2027 (IT)	Main rate writing-down allowance falls from 14% to 12%	Announced; Finance Bill 2026-27
6 April 2027	Van benefit £4,310, van fuel £825; payrolling of car and van benefits	Announced at Budget 2026

Where an accounting period straddles 1 April 2027, "A hybrid rate of WDA will apply", set by the proportion of the period before and after the change (HMRC policy paper). The 50% allowance and the 12% rate are announced, not yet law. HMRC says its manual guidance on the 50% rate "will be updated once the Finance Bill receives Royal Assent".

About this guide

THRIVE researched this guide from the Capital Allowances Act 2001, the Corporation Tax Act 2009, the VAT (Input Tax) Order 1992 on legislation.gov.uk, HMRC's Business Income, Capital Allowances and VAT Input Tax manuals, VAT Notice 700/64, and the Budget 2025 and Budget 2026 policy papers, all read on 12 November 2026. Legislation.gov.uk showed each section as up to date to 9 to 12 November 2026. The worked example is THRIVE's arithmetic on stated assumptions.

What we could not confirm: how chargepoint spending will be treated after 31 March 2027; whether a particular hire purchase contract passes the accounting test in section 67; and the Corporation Tax rate for financial year 2027, which the example assumes stays at 25%. The guide does not cover Northern Ireland differences, partial exemption, the flat rate VAT scheme, the cash basis, simplified mileage expenses, employee-owned cars, or the tax position of the lessor's rental income.

THRIVE will review this guide on 1 January 2027, when Finance Bill 2026-27 receives Royal Assent, and on 1 April 2027, or sooner if the Treasury extends the zero-emission car allowance.

Cite as: THRIVE, Lease or buy? How company cars and vans are taxed for the business, thrivefleet.co.uk. The figures are free to quote with a link to this page.