Company Car Resources

Types of Car Buying & Financing Options

When it comes to getting a company car through your limited company, you’ve got several routes to choose from. Each has different implications for cash flow, tax relief, and what appears on your balance sheet, so understanding the basics helps you pick what works best for your business.

Outright Purchase

Arguable the simplest option. Your company buys the vehicle outright, owns it immediately, and can claim capital allowances to reduce your corporation tax bill. Electric vehicles are particularly attractive here, as you can claim 100% of the purchase price as a first year allowance if you buy before 31 March 2026 for corporation tax purposes. The downside is the significant upfront cost and the fact you can’t reclaim any of the VAT on the purchase (unless the car meets very strict business-only use conditions, which is rare). You’ll also need to manage the vehicle’s depreciation and eventual disposal yourself.

Hire Purchase

This spreads the cost whilst still giving you ownership benefits. You pay an initial deposit followed by monthly instalments, and once you’ve made all the payments plus a small option fee, the car becomes yours. The brilliant thing about hire purchase is that HMRC treats it as if you own the car from day one, so you can still claim those valuable capital allowances immediately. You can’t reclaim the VAT on cars (it’s blocked), but the VAT is reclaimable if you’re VAT registered. Only the interest element of your monthly payments is tax deductible as the capital element is covered by capital allowances. Most businesses find hire purchase offers the best balance between preserving cash flow and maximising tax relief, especially for electric vehicles whilst the 100% FYA is still available.

Leasing

Whether finance lease, operating lease, or contract hire, this means you never own the vehicle. Instead, you pay monthly rentals to use it for an agreed period, then hand it back. The monthly payments are treated as a business expense for tax purposes, though if the car emits over 50g/km of CO2, you can only claim 85% of the rental cost. The real advantage with leasing is VAT: you can reclaim 50% of the VAT on your monthly payments, which you can’t do when buying. Contract hire packages often include maintenance, road tax, and breakdown cover, making budgeting simpler. The catch is that you’ll face mileage restrictions and potential charges for any damage beyond normal wear and tear.

Salary Sacrifice

Salary Sacrifice is a bit different as it’s an arrangement between your company and its employees (including yourself as a director). The employee gives up part of their gross salary in exchange for a company car, with the business taking out the lease. This saves the employee income tax and National Insurance on the sacrificed amount, whilst your company saves 13.8% employer’s NI. It works brilliantly for electric vehicles with their low Benefit-in-Kind rates (currently 2% for 2024/25, rising to 3% in 2025/26). The company still gets the usual leasing benefits like 50% VAT recovery and tax-deductible rental payments. Just make sure the sacrifice doesn’t take anyone below minimum wage and get the paperwork right for HMRC.