Small car lease: everything you need to know

Over 350,000 cars are currently on lease through UK brokers. Small cars make up an important portion of this market and offer SMEs an affordable way to access reliable transport without the large upfront costs of buying the car outright.

But leasing isn’t right for every business. And even when it is, choosing the wrong deal or missing key tax benefits could cost you more than buying outright.

Get the decision right, and you’ll improve your cash flow while accessing better vehicles than you could afford to buy. Get it wrong, and you could face expensive penalties, tax complications, or find yourself locked into a deal that doesn’t suit your growing business.

In this article, we’ll explain everything UK SMEs need to know about small car leasing, from comparing costs to avoiding common pitfalls.

Key points:

• Leasing a small car could save UK SMEs a lot of money, with monthly payments often 30-50% cheaper than buying on hire purchase

• Electric cars are particularly advantageous because they have much lower tax rates

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

Should your business lease or buy a small car?

Whether you should lease or buy a small car depends on your cash flow, how long you’ll need the car, and whether you want to own it at the end.

Leasing typically costs less each month because you’re only paying for the car’s depreciation and the finance company’s profit. You’re not paying for the full value like you would with a hire purchase arrangement.

For a £20,000 small car, your monthly lease payments might be around £200-250, while hire purchase could cost around £350-400 per month.

But there’s a catch... with leasing, you don’t own anything at the end. If you hand the car back after three years, you might have paid around £7,000-9,000 with nothing to show for it. Yet if you buy the same car, you’d have paid more monthly but would own an asset worth perhaps £8,000-10,000.

The break-even point usually comes at around five to six years. If you’ll need the car for longer than that, buying could work out cheaper overall. And if you prefer switching to a newer model every few years, leasing could be a more suitable option.

Cash flow also matters. Smaller businesses often benefit from the lower monthly payments of leasing, particularly when you’re investing heavily in growth. That extra £150-200 a month could fund marketing, stock, or staff instead of sitting in a depreciating asset. But established businesses with steady cash flow might prefer outright ownership for the long-term cost savings and asset value.

Finally, it’s worth considering that many lease deals include servicing, MOTs, and even replacement tyres. That could save you hundreds a year in unexpected bills.

What tax benefits could your business claim from leasing?

The tax savings could be substantial, but they’ll vary a lot depending on whether you choose a petrol, diesel, or electric car.

VAT

If your business is VAT registered, you can typically reclaim 50% of the VAT on your monthly lease payments if the car’s used for both business and personal purposes. If it’s used exclusively for business (which involves meeting strict conditions), you could reclaim 100%. For example, on a £250 monthly lease payment, you could claim back up to around £41 per month (based on 20% VAT).

Corporation tax

Corporation tax relief works differently:

• You can usually offset 85% of your lease payments against your taxable profits for petrol and diesel cars

• For zero CO2 emission electric cars electric cars, you can offset 100% of the lease payments

If your business pays corporation tax at 25%, every £1,000 in lease payments could reduce your tax bill by up to £250.

Benefit-in-kind rates

The biggest tax advantages come with electric cars through Benefit-in-Kind (BIK) rates. Since April 2025, electric cars have been taxed at just 3% BIK, and this will rise gradually to 5% by 2027/28. For comparison, petrol and diesel cars can attract BIK rates of 25-37%, depending on their CO2 emissions.

In practice, this means that for a £30,000 electric car, a basic rate taxpayer would pay around £180 per year in BIK tax (3% of £30,000 = £900 taxable benefit, taxed at 20%). The same person driving a £30,000 petrol car emitting 150g/km CO2, attracting a BIK rate of about 30%, would pay around £1,800 per year. So going electric is potentially £1,620 per year cheaper for businesses.

Salary sacrifice

The numbers get even more attractive with salary sacrifice schemes. These grew in popularity by 63% in 2024, with nearly 90% of new leases being electric vehicles.

This allows employees to lease cars through their employer using gross salary, reducing both income tax and National Insurance contributions.

Capital allowances

With leasing, you can’t claim capital allowances because you don’t actually own the asset. But you can usually deduct the lease payments as business expenses, which can be simpler to manage than calculating annual writing-down allowances.

If you’re not sure whether leasing or alternative financing suits your particular tax situation better, asset finance could help you evaluate the options to decide what best meets your specific tax needs.

What are the best small cars for business leasing?

We’re not car experts at Funding Options by Tide (we prefer to stick to business finance), so we can’t judge which models offer the best value or reliability. But we can look at the data to find out which small cars are ‌most commonly leased by businesses.

Over a million cars were leased by UK businesses in 2024, with the majority being large and crossover vehicles.

The most leased small cars (including compact SUVs and crossovers) were:

• Hyundai Tucson (125,000 leased)

• Volkswagen Tiguan (113,000 leased)

• Volkswagen ID.3 (85,000 leased)

• BMW ix1 (84,000 leased)

• Volkswagen Golf (77,000 leased)

• Nissan Qashqai (68,000 leased)

Numbers aside, you’ll want to choose the right car for your needs as the most popular may not be right for you. For example, a solicitor’s firm might prefer the understated professionalism of a Golf or Puma, while a creative agency could benefit from the forward-thinking impression of an electric vehicle.

Range also matters for electric vehicles. Most modern EVs offer over 200 miles of range, but you’ll want to consider how much driving you’ll actually do – a Nissan Leaf’s 239-mile range may work well for urban businesses, while a Volkswagen ID.3 EV’s 336-mile range may suit businesses that regularly do longer journeys.

How can you choose the right lease deal for your business?

Choosing the right lease deal for your business involves considering several factors that will affect the cost and suitability of the agreement:

• Lease type: You have two options – Business Contract Hire (BCH) and a finance lease. BCH is the most popular type of lease, where you simply rent the car for an agreed period (eg three years) and hand it back at the end. Finance leases give you more flexibility, often with an option to buy the car at the end of the term

• Contract length: Shorter contracts (eg two years) offer more flexibility but cost more per month, while longer contracts (eg four years) reduce monthly payments but limit your options. Three year deals can be a good balance of cost and flexibility

• Mileage allowances: Most lease deals let you drive 8,000-12,000 miles per year. If you go over this, excess mileage charges can be expensive (typically around 5-15p per mile). Consider your needs – a sales team covering a large territory might need over 20,000 miles annually, while office-based staff might manage on a 6,000 mile allowance

• Initial rental: Your upfront payment will likely range from one to 12 months’ worth of payments. Higher initial rentals reduce monthly costs but tie up more cash upfront

• Maintenance packages: This can add around £30-60 to the monthly cost, but it can save money overall by covering servicing, MOTs, and replacement tyres. This can help make your costs more predictable too

• Insurance costs: Leased cars typically require comprehensive cover, and some lease companies have minimum coverage requirements. So get insurance quotes before committing to a lease to make sure the total cost works for your budget

What risks should you consider when leasing a small car?

There are lots of upsides to leasing a small car instead of buying one outright. But there are several potential downsides you should also consider:

• Excess mileage charges: These can cost around 5-15p per ‌mile you use over your allowance. So if you underestimate your annual mileage by 5,000 miles, you could face a £250-750 bill when returning the car

• Early termination penalties: Ending your lease early can cost around 50% of your remaining payments. So on an 18-month early termination of a £300 per-month lease, you could expect to pay around £2,700

• Fair wear and tear charges: Any damage beyond normal use will likely get charged at the end. For example, a scratched alloy wheel could cost £150 to repair, and interior stains could cost £200-500

• Insurance requirements: Leased cars need comprehensive insurance, which can add £200-500 per year compared to standard business cover

• Contract limitations: Unlike owned vehicles, you can’t easily modify leased cars or use them as security for other loans

Planning your mileage also deserves special attention. 74% of businesses have no employees other than the owner, meaning you’re likely doing the driving yourself. So you’ll want to track your current mileage carefully before committing to an allowance.

Business growth can also affect your needs. For example, if your business grows quickly, you might outgrow a small car within the lease term – when you can’t easily upgrade mid-contract.

Wider economic factors can affect the cost of leasing, too. Any changes to the Bank of England’s interest rate during your lease term won’t affect your existing contracts, but it could impact you when it comes to renewal.

How do you plan for the future with your lease?

To make sure you avoid any surprises, it’s a good idea to plan your exit strategy from day one.

Consider the following when you choose your lease:

• Prepare for end-of-lease inspection: Start checking your car’s condition 3-6 months before the lease ends. If there are any minor issues, address them early to avoid higher penalty charges

• Manage your mileage: Monitor your mileage throughout the lease term. If you’re approaching your limit early, consider asking to increase your allowance mid-term rather than facing excess charges at the end

• Time your replacement: Think about ordering your next lease car 6-8 weeks before your current lease ends to avoid gaps in availability

• Consider your business growth: Think about how your travel needs might change as your business grows over the coming years. A successful business might need a larger vehicle or additional cars for new staff

Most lease companies will offer extensions if you need extra time, typically on monthly rolling contracts. This will cost more than your original rate, but it will provide flexibility while you arrange your next vehicle.

Some leases include purchase options, although these aren’t always good value. The purchase price is usually set at the start of the lease based on predicted future value. But it may make more sense to buy privately if you’re thinking about this.

If you’re thinking about leasing an electric car, consider how quickly technology advances, how charging infrastructure and demand may change, and how the cost of electricity can fluctuate over time. Your electric lease car replacement might offer much better range and features than your current vehicle, so it may be worth considering a shorter lease if that’s important to you.

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FAQs

Can I get a small car lease with poor business credit?

Possibly, but your options might be more limited and the terms less favourable. Asset finance has 96% approval rates compared to 44% for traditional bank loans, so leasing companies are often more flexible than banks. Some also specialise in helping businesses with poor credit.

What’s the difference between personal and business car leasing?

Business leasing offers tax advantages like VAT recovery and corporation tax relief on payments, but requires VAT registration and proper business use documentation. Personal leasing doesn’t offer tax benefits but has fewer usage restrictions.

Can I end my small car lease early if my business circumstances change?

Usually, but it can be expensive – typically around 50% of your remaining payments plus any excess mileage or damage charges. Some lease companies offer early termination insurance, which you could consider if you want flexibility.

How does electric vehicle leasing compare to petrol cars for tax purposes?

Electric vehicles offer much better tax treatment, with 3% benefit-in-kind (BIK) rates from April 2025 compared to 25-37% for petrol cars. You can also offset 100% of lease payments against corporation tax for electric cars, compared to 85% for petrol cars.

What happens if I go over my mileage allowance?

You’ll be charged for excess mileage, typically 5-15p per mile over your allowance. So on a 10,000-mile annual allowance, driving 15,000 miles would cost an extra £250-750. You may be able to increase your allowance mid-contract if you expect to go over the annual limit.

Do I need special insurance for a leased small car?

Yes, you’ll need comprehensive insurance that meets your lease company’s minimum requirements. This is typically more expensive than standard car cover, but it protects you against damage or theft throughout the lease term.

Can I modify a leased small car for business purposes?

Usually not without permission from your lease company, since modifications can affect the car’s value (and void your agreement). If you need specific equipment like roof racks or signage, discuss this with your lease provider before signing.

What documentation do I need for business car lease tax benefits?

Keep hold of all lease agreements, payment receipts, mileage logs, and business use records. HMRC may require proof that the car is used for business purposes to justify VAT recovery and corporation tax deductions.

How far in advance should I arrange my next lease car?

It’s sensible to start planning 8-12 weeks before your current lease ends. Popular models can have long lead times, and this gives you time to compare the deal without the added time pressure. Some leasing companies also offer loyalty discounts for repeat customers.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.