Is car leasing and PCP
tax deductible?

Partly. Lease payments on a car used in the business are allowable for the business share, but for a car first leased from 6 April 2021 with CO2 emissions over 50g/km, 15% of the rental is disallowed (SA103F notes; BIM47714). A PCP or hire purchase deal is treated as buying the car, so it goes through capital allowances, with the interest as a finance cost.

How you pay for a car changes how you get tax relief for it. A lease is a rental, so the payments are a running cost. A PCP or hire purchase agreement, where you can end up owning the car, is treated as a purchase, so the car goes through capital allowances and only the interest is a running cost. The mileage rate is the third option, and replaces both.

Is car leasing and PCP tax deductible?

The HMRC rule

Bank, overdraft and card charges, interest on business loans, hire purchase interest and leasing payments are allowable. Repayments of the loan itself are not. Interest on loans has its own quarterly-update field, interest, separate from these charges. The rule comes from Self-employment (full) notes, SA103F, HMRC Business Income Manual BIM47714: car hire and lease rental restriction, Capital allowances: business cars.

The SA103F notes say that if you lease or hire a car you may not be able to claim all of the rental: for a car leased on or after 6 April 2021 with CO2 emissions over 50g/km, you must disallow 15% of the hire charge (SA103F notes). HMRC's manual explains the restriction (BIM47714), which applies on the cash basis too. Hire purchase interest and leasing payments are on GOV.UK's list of allowable financial costs, and repayments of the amount borrowed are not (legal and financial costs). A car bought on finance is relieved through car capital allowances (business cars).

When you can claim it

• Car lease rentals, for the business share, less 15% for a high-emission car leased from April 2021.
• Full lease rentals, for the business share, on an electric or low-emission car.
• Capital allowances on a car bought on PCP or hire purchase, plus the business share of the interest.
• The mileage rate instead of lease or finance costs for the car.

When you cannot

• 15% of the rental on a car leased from April 2021 that emits over 50g/km.
• The capital element of PCP or hire purchase instalments as an expense.
• Lease or finance costs for a car whose business use you claim at the mileage rate.
• The private-use share of any of these costs.

What to claim instead

If the leasing or finance calculation is more than you want to manage, the mileage rate, 55p a mile for the first 10,000 business miles in 2026/27, covers the car's cost in any form, whether leased, financed or bought outright. You then keep a log of business miles and nothing else for the car.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? Whether it is a running cost or something you keep depends on what you buy. Items used up within two years, and regular renewals, are running costs; things you keep are relieved through capital allowances on traditional accounting and as expenses on the cash basis.
4. Is there a specific rule? For car leasing and PCP, the deciding rule is bank charges, interest and finance costs: bank, overdraft and card charges, interest on business loans, hire purchase interest and leasing payments are allowable. Repayments of the loan itself are not. Interest on loans has its own quarterly-update field, interest, separate from these charges.

Worked example: a leased petrol car

A marketing consultant leases a petrol car emitting 115g/km from 2026 at £400 a month, £4,800 a year, and uses it 60% for business. The 15% restriction cuts the allowable rental to £4,080, and 60% of that is £2,448, which she claims alongside 60% of fuel and insurance. For a comparable electric car, the full £4,800 would count before the 60% restriction: £2,880.

Is PCP a lease or a purchase?

Personal contract purchase is a finance agreement with an option to buy the car at the end for a final payment. Because you may become the owner, it is treated like hire purchase for tax: you are treated as buying the car when you take it, so it goes through car capital allowances on its cash price, and the interest element of the payments is a finance cost. A personal or business contract hire agreement with no option to buy is a lease, and the rental is the running cost.

Working out the 15% restriction

The restriction applies only to cars, not vans, and only where the car's CO2 emissions exceed 50g/km and the lease began on or after 6 April 2021 (older leases follow earlier thresholds). Take 15% off the rental first, then apply your business-use percentage. Any separate maintenance charge in the lease is a running cost and is not restricted, so ask the leasing company for the split.

Leasing a van instead

Vans are not cars, so the 15% restriction never applies to them. Van lease rentals are allowable in full for the business share. A van bought on hire purchase is treated as bought: an ordinary expense on the cash basis, or the Annual Investment Allowance on traditional accounting, with the interest as a finance cost. See van leasing and finance.

Ending a lease early

An early termination charge on a business car lease is generally part of the cost of leasing the car, and follows the same treatment as the rentals, including the business-use restriction. Keep the settlement statement. Buying the car at the end of a PCP is the completion of the purchase already being relieved through capital allowances, not a new expense.

Where it goes on your return and in MTD

For a sole trader, the allowable part goes under car, van and travel expenses (SA103F box 20 on the full self-employment pages). Under Making Tax Digital for Income Tax, it goes in the same category of your quarterly update, which is the category TapTax files it under when you record the cost.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

Most sole traders now use the cash basis, the default from the 2024/25 tax year, which counts a cost when you pay it. On traditional accounting you count it when you incur it, and equipment you keep goes through capital allowances rather than expenses.

How much an allowable cost saves

The value of a deduction is the tax it removes from your profit, not the cost itself. At the basic rate a sole trader saves 26p for every pound of allowable expense, at the higher rate 42p, and in the personal allowance taper between £100,000 and £125,140 as much as 62p. Landlords pay no Class 4 on rental profit, so they save 20p or 40p.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

Keep the purchase, lease or finance agreement, every invoice for running costs, and a mileage log showing business and total miles, so you can support the business percentage. For a car, keep its official CO2 figure and the date you first leased or bought it, because both decide how it is treated.

From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep these records digitally and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028. The MTD requirement checker shows when it applies to you.

Common mistakes

• Claiming full rentals on a high-emission car leased after April 2021, without the 15% restriction.
• Claiming PCP instalments as rent rather than capital allowances plus interest.
• Claiming lease costs as well as the mileage rate for the same car.

Related expenses

This item sits in the car, van and travel expenses category, alongside buying a car, buying a van, car insurance, car repairs and servicing, electric and hybrid cars, food and meals, fuel and hotels. The A to Z of expenses answers the same question for every other cost.

TapTax sorts each cost into the right category as you record it, applies the business share where you set one, and keeps the receipts with the figures, ready for your quarterly updates and final return.