Cars should you lease or buy?

cars should you lease or buy

New Cars: Should you lease or buy? And, what tax breaks remain?

The answer to whether you should lease or buy will depend on your personal circumstances. So first work out which option is the best deal for you financially. This will not necessarily be the option attracting the most tax relief.



For a cash purchase of a car, tax relief on the cost of the car is given as a capital allowance and spread over the period the car is owned. However, claims are restricted to the business use of the car and an adjustment is made based on the proportion of personal mileage relative to total mileage.



If a loan is taken out to buy the car, tax relief will be given on the loan interest, in addition to capital allowances on the cost of the car. As with the capital allowances, the deduction for the loan interest is restricted to the business use proportion.



Acquiring a car on hire purchase is similar to acquiring a car using a loan, with capital allowances for the cost of the car and a deduction for interest, both of which are restricted for business use.


Tax rules

The tax rules for leasing a car are different, because the lessor retains ownership of the vehicle during the term of the lease. Capital allowances are not available because the lessor owns the vehicle, but tax relief may be claimed on the rental payments. Again, this will be subject to a private use adjustment.


It pays to be green

Cars with a CO2 emissions figure exceeding 130g/km are subject to a further 15% restriction. For example, for a lease rental of £1,000 per month with 80% business use and CO2 emissions of 140g/km, the tax deductible amount is £680 per month (£1,000 x 80% x 85%).

If there is an option to buy the vehicle with a single payment at the end of the lease, tax relief is available on the rental payments during the lease term and capital allowances may be claimed on the final purchase payment.

Whichever option is chosen to acquire the car, tax relief on the running expenses is the same. In a limited company, the benefit in kind arising on directors who have their fuel paid by the business is a flat rate linked to the emissions rate of the vehicle. Very often this is not found to be worthwhile. As a general indication, your private mileage would need to exceed 11,000 miles per annum driving a modest car, and more if the engine size increases.

Alternatively, a mileage allowance can be claimed for all business miles, which includes a contribution towards the servicing and maintenance. Currently payments up to 45p for the first 10,000 miles and 25p thereafter can be claimed without any benefit arising.

In a partnership or LLP, any private elements of a partner’s motor running expense paid for by the practice is disallowed in the business tax computations.

Practices trading as partnerships may also be entitled to tax relief on repairs to a partner’s car when it is a personal asset used within the business, even if the cost has been paid for by the partner themselves. Again, an adjustment for personal use is required.


Cars can be a bit of a minefield when it comes to lease or buy decisions – we are here to help.

Trish Kinahan, Hazlewoods

Do contact us if you would like more information on this subject, or to talk about any aspect of law firm finance or strategic planning.

Hazlewoods team of 27 specialises in strategic, financial and taxation matters across the legal sector. Collectively we have amassed over 185 years’ service in advising law firms of all shapes and sizes. Hazlewoods is well known for its compliance services but also advising on many strategic matters such as mergers and acquisitions, valuations of practices and improving performance (both profitability and cash flow) for practice.  With over 185 years of experience in the team, we have seen everything!

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