If you are self-employed, choosing between a personal lease and a business lease is one of the most consequential financial decisions you will make when getting a new car. The answer is not the same for everyone. It depends on how your business is structured, whether you operate through a limited company, and how much of the car’s use is genuinely personal. This article sets out the key differences, the tax implications for the 2026/27 tax year, and a practical framework to help you decide which route makes more sense for your situation.
Key takeaways
- A personal lease has no benefit in kind charge and no employer National Insurance liability, making it straightforward for sole traders and self-employed people who use the car personally.
- A business lease through a limited company allows a 50% VAT reclaim on monthly payments, but any personal use triggers a benefit in kind tax charge calculated on the car’s P11D value.
- For a zero-emission electric vehicle in 2026/27, the benefit in kind rate is 4%, producing a tax cost of £640 per year for a 40% taxpayer on a £40,000 car.
- The approved mileage allowance payment rate for business miles rose to 55p per mile for the first 10,000 miles in 2026/27, relevant if you use a personally leased car for business journeys.
- There is no single correct answer: the right lease type depends on your business structure, VAT registration status, income tax rate, and the proportion of personal to business mileage.
What actually changes depending on which lease you choose
A personal lease, also known as personal contract hire (PCH), is taken out in your name as a private individual. You pay fixed monthly payments, hand the car back at the end of the contract, and the arrangement has no connection to your business entity. There is no benefit in kind (BIK) charge, no employer National Insurance, and no VAT reclaim. The cost you see is the cost you pay.
A business lease is taken out through your limited company. The company makes the monthly payments, and the car may appear on the company’s books. If you use the car for any personal journeys, including commuting, HMRC treats it as a taxable benefit. That triggers benefit in kind tax, which is calculated using the car’s P11D value (the manufacturer’s list price including options, excluding the first registration fee and road tax) multiplied by a percentage set by HMRC based on the car’s CO2 emissions.
For a zero-emission electric vehicle in 2026/27, that BIK percentage is 4%. For a £40,000 electric car, the taxable benefit is £1,600 per year. A 40% taxpayer pays £640 per year in personal income tax on that benefit. A 20% taxpayer pays £320. On top of that, the company pays Class 1A National Insurance at 13.8% on the BIK value, which adds £220 per year in this example.
For a petrol car, the numbers are significantly higher. A £40,000 petrol car at a 17% BIK rate produces a taxable benefit of £6,800 per year. A 40% taxpayer pays £2,720 per year in personal tax on that alone.
The VAT reclaim: the main reason a business lease can still make sense
The one area where a business lease has a clear advantage is VAT. If you are VAT-registered and lease through your limited company, you can reclaim 50% of the VAT on monthly lease payments, even if the car is used partly for personal journeys. If the car is used exclusively for business, you can reclaim 100% of the VAT.
With a personal lease, you cannot reclaim any VAT. You pay the full consumer price, which includes VAT at 20%.
This matters most if your monthly lease payment is substantial. On a £500 per month lease, the VAT element is £83.33. A 50% reclaim saves your business £41.67 per month, or £500 over a 12-month period. Over a three-year contract, that is £1,500 back to the business, which partially offsets the BIK tax cost depending on your tax rate and the car’s emissions band.
Whether the VAT saving outweighs the BIK tax cost depends on the specific car, your income tax rate, and how much of the use is personal. For an electric vehicle, the BIK rate is low enough that the VAT reclaim can tip the calculation in favour of a business lease. For a high-emission petrol car, the BIK tax will almost certainly exceed any VAT saving.
How the 2026/27 tax changes affect the calculation
The BIK rate for zero-emission electric vehicles rose from 3% to 4% on 6 April 2026. That is a confirmed increase, and further rises are already scheduled: 5% in 2027/28, 7% in 2028/29, and 9% in 2029/30. Electric vehicles remain significantly cheaper to run through a company than petrol or diesel cars, where BIK rates for high-emission vehicles will reach 37% to 39% by 2029/30.
Road tax (Vehicle Excise Duty) also changed for electric vehicles from April 2025. EVs now pay a standard rate of £200 per year from the second year of registration. EVs with a list price above £50,000 (the threshold was raised from £40,000 in April 2026) also attract the expensive car supplement of £440 per year for five years, bringing the total to £640 per year for those vehicles.
One other rate worth noting: the approved mileage allowance payment (AMAP) for business miles increased to 55p per mile for the first 10,000 miles in 2026/27, up from 45p. If you use a personally leased car for business journeys and your company reimburses you, this is the rate at which you can be reimbursed tax-free. This is only relevant if you are using a personal lease car for business mileage and claiming through your company.
Which option suits which type of self-employed person
The right answer depends on your business structure and how you use the car.
If you operate as a sole trader, you do not have a limited company, so a business lease in the traditional sense is not available to you. A personal lease is the practical default. You pay from your personal income, there is no BIK exposure, and the cost is straightforward.
If you operate through a limited company and the car will be used almost entirely for business, a business lease with full VAT reclaim can work in your favour, particularly for an electric vehicle where the BIK rate is still relatively low. You would need to keep records of business use to support a 100% VAT reclaim.
If you operate through a limited company but the car will be used for personal journeys, the BIK charge applies from the moment personal use begins. In that scenario, a personal lease avoids the tax entirely. You pay from your personal post-tax income, but you also avoid the additional employer National Insurance your company would otherwise owe.
If you drive an electric vehicle and are a higher-rate taxpayer, the BIK cost through a company lease in 2026/27 is £640 per year on a £40,000 EV. If the VAT reclaim saves more than that over the contract, the business lease may still be cost-effective. If not, the personal lease is cleaner.
There is no universal answer. The numbers are specific to your car, your tax rate, your VAT status, and your mileage split. Taking advice from an accountant before signing either type of agreement is worth the cost of the conversation.
A note on the figures in this article. The tax and cost examples above are illustrative, based on a £40,000 car and HMRC rates for the 2026/27 tax year, and are correct as at July 2026. Benefit in kind rates, VAT rules and allowances are set by government and change in future Budgets. Your own position depends on your car, income, VAT status and how the vehicle is used. This is general information, not tax or financial advice; confirm your position with a qualified accountant before signing either type of agreement.
A note on salary sacrifice for self-employed directors
Salary sacrifice is sometimes raised as a third option. For most self-employed directors, it is not straightforward. If you use the car for personal journeys, even commuting counts, the car is still taxable as a benefit in kind under BIK rules. Salary sacrifice does not remove that liability for a company car used personally. It is worth understanding this before assuming salary sacrifice removes the tax exposure entirely.
Ready to compare your options?
Browse our personal lease deals and business lease deals to see current monthly payments across a range of makes and models. If you are unsure which route is right for your situation, our team can walk you through the numbers. Use the contact page to get in touch, or speak to your accountant alongside reviewing your options with us.
Frequently asked questions
Yes. Any UK resident can apply for a personal lease, regardless of employment status. Lenders will assess your credit history and income. Being self-employed does not disqualify you, though you may be asked to provide accounts or bank statements as proof of income.
A personal lease taken out in your own name does not create a benefit in kind charge and does not need to be declared on a self-assessment tax return as a company benefit. However, if you use the car for business miles and claim mileage allowance through your company, those payments should be recorded accurately.
The BIK rate for zero-emission electric vehicles is 4% for the 2026/27 tax year. It rises to 5% in 2027/28, 7% in 2028/29, and 9% in 2029/30.
No. VAT cannot be reclaimed on a personal lease. VAT reclaim is only available on a business lease taken through a VAT-registered company, and even then the standard reclaim is 50% unless the car is used exclusively for business.
No. HMRC does not treat commuting as business use. If a company car is available for private use, including commuting, the full BIK charge applies regardless of how many miles are actually driven for work purposes.
A personal lease is a contract between you and the finance provider in your own name. If your business structure changes, for example you move from sole trader to limited company, the personal lease is unaffected. You cannot transfer a personal lease into a company name without ending the existing agreement, which may incur early termination charges.
