Car leasing & contract hire

Conditions

• Car lease and contract hire rental payments are treated as a revenue (not capital) expense and are deductible against trading profits, provided the car is used for business. Unlike buying a car — which enters the capital allowances pool — lease rentals are claimed in the period they are paid or accrued under normal accounting rules.
• A statutory 15% flat-rate disallowance applies to rental payments for cars with CO2 emissions above 50g/km (ITTOIA 2005 ss48–50B for income tax; CTA 2009 ss56–58B for corporation tax). This threshold has been 50g/km since 1 April 2021 (Corporation Tax) and 6 April 2021 (Income Tax); for leases on cars first registered before those dates the previous 110g/km threshold still applies. Fifteen percent of the rental cost is simply not deductible — there is no relief for it at all.
• Cars with CO2 emissions of 50g/km or below are not subject to the 15% disallowance. Rental payments for these vehicles — including fully electric cars — are deductible in full (subject to the private-use restriction below). This makes low-emission and electric cars significantly more tax-efficient to lease than higher-emission vehicles.
• Any element of a combined 'all-in' contract that represents maintenance, servicing or insurance (rather than the car hire itself) is deductible in full and is not subject to the 15% restriction. Where a contract bundles these together, HMRC expects a reasonable apportionment between the rental element and the service element.
• For a sole trader or partnership, the allowable lease rental must also be restricted for private use. If 30% of the car's use is private, only 70% of the (post-disallowance) rental is deductible. The mileage method (55p/mile for the first 10,000 business miles in 2026/27, then 25p/mile) cannot be combined with a separate lease-cost claim for the same vehicle.
• For a limited company, the 15% disallowance applies to the company's rental payment for a leased car. If the car is also available for private use by a director or employee, a company car benefit-in-kind charge arises on the user — but the company does not restrict its rental deduction for private use (unlike a sole trader). The two regimes — rental deduction and benefit-in-kind — operate independently.
• If a company or employer pays the lease directly for a car used on a director's or employee's private journeys, and the car is registered in the director's name rather than the company's, a pecuniary liability issue may arise. The cleaner approach for employee-owned leased cars is for the employee to pay the lease and receive mileage reimbursement (AMAP rates) rather than for the company to pay directly.

Common mistakes

• Not applying the 15% disallowance to a leased car emitting over 50g/km — the restriction is statutory and applies automatically.
• Claiming the mileage rate and separately deducting lease rentals for the same car — you must choose one method and use it for the life of that vehicle.
• Treating the maintenance or servicing element of an all-in contract as subject to the 15% restriction — it is not; only the rental/hire element is restricted.
• Applying the 15% disallowance to a lease on a car first registered before April 2021 without checking whether the old 110g/km threshold is still relevant.

What to keep

• Lease or contract hire agreement showing the car's CO2 emissions, the total rental amount and any breakdown of maintenance versus hire elements.
• Business mileage log or diary to support the private-use apportionment for a sole trader.

Real-world example

A limited company leases two cars. The first is a petrol car emitting 120g/km at £600 per month — the 15% disallowance means only £510 per month (£6,120 per year) is deductible. The second is a fully electric car at the same rental — no disallowance applies, so the full £7,200 per year is deductible. The electric car saves an additional £180 in deductible expense per year per £600/month of rental, before any benefit-in-kind difference.

Frequently asked

Related allowances