Understanding Business and Self Employed Car Finance

Running a company or working for yourself means you often need to get a good, reliable company vehicle. But it can be hard to know what is the best way to pay for it. This guide will help you learn about the main business car finance options in the UK. It covers HP, Lease Purchase, Business PCP, Finance Lease, and Business Contract Hire. You will also find out what most lenders ask for if you are self-employed. You can read about how VAT, corporation tax, and road tax work for people in the UK. The guide also explains BIK for you in simple words. There are helpful tips on how to make your cash flow better. You can look at clear examples you can follow, simple checklists you can use, and helpful tables so you can compare each car finance option. There is no confusing language here—just the facts and info you need.

Who this guide is for

• The text is for people who are business owners, directors of a limited company, work in an LLP, or work alone as sole traders. It’s for those who want to choose between owning, leasing, or claiming business mileage.
• It is also for self-employed drivers, like contractors, freelancers, or anyone doing private-hire work or taxi jobs. These are the people who want to know what rules to follow and what paperwork they need.
• This text helps anyone who wants to see how monthly payments work, learn end-of-term choices, and understand tax efficiency. It explains everything in a way that is clear and easy to read, without using tough words.

What are my options?

Hire Purchase (HP) / Conditional Sale

• How it works: You give an initial payment for the car. Then, you pay a fixed amount each month. This goes on until you finish paying the full value plus interest. When you make the last payment and add a small final fee, the car becomes yours.
• Good for: This is best for people who want to keep their car for a long time. It is an easy way to have your own car. There is no set mileage limit in the deal.
• Watch-outs: The car is usually listed on your balance sheet. You must think about how much interest you will pay if you choose this instead of using cash.

Lease Purchase (HP with Balloon)

• How it works: This is like hp. You will pay a big amount at the end, called a balloon. This helps keep your monthly payments low. You need to pay the balloon amount when the plan ends. You can pay it in cash, get more money through another loan, or trade your car in for another.
• Good for: This works well if you want low monthly payments for now but still want to be the owner of the car later.
• Watch-outs: If you pay the big balloon amount at the end, you could end up paying more in total interest than if you went with a plain hp plan.

Business PCP (Personal Contract Purchase)

• How it works: Most of your payments cover how much value the car loses over time. A GMFV (Guaranteed Minimum Future Value) is set at the end as one big payment, also called the balloon payment. When you reach the end of the agreement, you can pay this amount and keep the car. Or, you can trade it in. You can also just give it back. You must follow the mileage and fair wear rules.
• Good for: This deal is best for newer cars. It gives you lower monthly payments and more ways to choose what you want to do at the end.
• Watch-outs: You may need to pay more for extra mileage or if the car is not in good shape when you return it. If you want to buy the car, you must be able to pay the large balloon payment.

Finance Lease

• How it works: You lease the car. In this setup, you may need to make a final payment, sometimes called a balloon payment, at the end. At that time, you can sell the car to another person. You get to keep most of the money you get, but there is a fee for this. If you want, you can keep the car and pay a small rental to have it longer.
• Good for: This is good for VAT-registered businesses. It gives you many ways to set up a lease that works for you.
• Watch-outs: You may need to cover the risk of how much the car will be worth when you sell it. How much risk you take depends on the lease setup.

Business Contract Hire (BCH) / Operating Lease

• How it works: You sign up for a lease that lasts for a set time and gives you a set number of miles. After the time is up, you give the car back. You cannot buy it at the end. What you pay may also cover maintenance.
• Good for: A lease works well if you want your budget to be clear and want less paperwork to handle.
• Watch-outs: If you quit the lease early, you will have to pay more money. You might also get a charge if you go over the allowed mileage or the car is more used up when you give it back.

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Quick chooser table

You should get written quotes for car finance. After that, you can compare them side-by-side. Look at the APR, fees, term length, mileage, and the rules for what to do when the term ends. This helps you see what deal is the best for you.

VAT, BIK and capital allowances (high-level, UK-focused)

• VAT on leases: In the UK, if you use a car for both personal and business reasons, you can usually get back 50% of the VAT on the finance rental for a BCH or finance lease. If the maintenance cost is listed separately, you can often claim all the VAT on that part.
• VAT on HP: The VAT rules for hire purchase are not the same. What you can get back, and when, comes down to how the invoice is done and if the car is used only for business purposes.
• Capital allowances: Right now, you cannot use full expensing for cars. That rule works for some kinds of plant and machinery, but not for company cars. What you can claim depends on the CO₂ level and if it’s an electric vehicle with zero emissions. Vans use different rules, so check with your accountant if you need help.
• BIK (company car tax): If you are an employee or director with a company vehicle, the BIK rate depends on the value of the car (P11D value) and how much the car pollutes. Electric vehicles have a much lower BIK rate than petrol or diesel cars, so you could get good tax benefits.
• Sole traders: If you’re a sole trader using your own car for business, you do not pay BIK tax. You can claim business mileage at the AMAP rate or claim part of your business expenses for travel related to work.

Documentation to Support a VAT Claim on a Business-Financed Company Car

Most of getting VAT right is about having the paperwork in order. The best way to do it is to make an audit-ready pack. This will help you show business use, offer proof of the finance agreement, and make it clear how the VAT is split between the rentals and the maintenance.

Core business & VAT credentials

• VAT registration certificate and vat number.
• Company details that match all invoices. This shows the legal name and address.
• VAT return workings that show where each invoice was used. It should also show if there is any partial exemption apportionment.

Finance type → what to keep

A Business Contract Hire or Finance Lease is a kind of lease for business use. It lets you use a car, van, or another vehicle for a certain time. You pay the same amount every month, so it helps you plan your budget. You do not own the vehicle—the business only uses it for as long as the lease lasts. When the time is up, you give the vehicle back. This is a good way to get a new vehicle for your business without buying one.

• A finance agreement that shows the term, how many miles you can use, and details about who gives the money.
• Monthly VAT invoices for rentals. These should show the amount for the finance rental. If the car is for personal use, only half the VAT can be claimed. They also need to show maintenance as a separate amount. Many people can get all the VAT back on maintenance if it is split out.
• Initial/advance rental invoice that shows the VAT parts clearly.
• Any admin/option fees invoices. These should also show how the VAT is split.

In the hire purchase or lease option, you get to use the item right away. You pay for it with small amounts over time. If you choose hire purchase, the item from the seller only becomes yours after you make all payments. If you choose lease, you pay to use the item, but it may not belong to you, even when you finish paying. This way is good if you do not want to pay all your money at once. A lot of people pick this method for things like cars or machines. If you want to own the item later, you can ask the seller for hire purchase or lease options.

• The HP agreement has to show the cash price, deposit, if there is any balloon payment, and who the supplier is.
• A VAT invoice for the vehicle should be in the business name, if you have been charged VAT.
• You need proof that the car is for business use (see below).

  Note: Most of the time, you cannot claim input VAT on cars if there is personal use or private use. If you want to have the VAT back and the car is really not available for private use, make sure you keep proof to show that.

Proving business use (and, if applicable, “no private use”)

• A company car policy explains how you can use the company car. It tells you what is okay for business purposes and what you can do when it comes to personal use.
• A driver declaration is you saying that you get there is no private use of the car if that is the setup.
• The insurance schedule shows if the car is covered for business use. It also points out if the company car cannot be used for private reasons.
• A garage or parking policy tells you all about where the company car should be kept, like having it at your work. It also goes over where to keep the keys.
• You need to keep detailed mileage records every time the car goes out. Write the date, start and end times, say what the trip was for, and put down the miles you travelled. These records help you break up business mileage and trips that are for personal use.
• If your car is called a pool car, there will be booking logs for it. These logs show who gets use of the car, the time they use it, and what reason you have for using the car. You need these booking logs to say it is a “pool car.”

Fuel & electricity (running costs)

• Fuel VAT invoices/receipts must show the name of the supplier, the date, the VAT rate, and the money amount.
• You need to put in fuel scale charge details if your business pays for fuel when one of your people uses the car for trips that are not for work.
• For EV charging evidence, keep your workplace charging point bills, electricity bills from your business places, and reports about charging times if you have them. Plus, be clear about your way to pay back people for charging at home. Also, tell what you do to be sure you do not claim VAT on home use if the business is not allowed to.
• If you pay back drivers by using the Advisory Electricity Rate, you need to keep logs of mileage to show business use and write down which rate you use.

Maintenance, tyres, and extras

• You will get invoices that show the cost for servicing, tyres, breakdown cover, and rentals that include maintenance. The fee for maintenance is listed on a separate line for VAT.
• You also get invoices for things like windscreen repairs. These are good to have if there is any dispute when you hand back the car.

If you’re claiming 100% VAT recovery on a car (rare)

• Gather solid proof that the car is not used for personal use. This can be the company policy, what the driver says, the words in the insurance papers. Keep the car locked up overnight at the business building. Show a pool-car rota or log. Say any things you do to control the car, like keeping the keys at the office.
• Keep this file with the VAT invoices. HMRC wants to see everything together, not just one paper.

Partial exemption & apportionment (if relevant)

• Method statement for how you split input VAT between supplies that you add tax to and those that be exempt.

To work out the input VAT on your supplies, you split all the costs between the ones where you charge VAT and the ones that be exempt. You check each cost to see if you need to add tax. For the costs you use for both taxed and exempt supplies, you work out the correct part by using a fair split, like the number of sales for each type. This helps make sure that you only claim VAT on what you can.

• Annual adjustment steps and entries in the books.

At the end of the year, you look back at the VAT you claimed and check it against how much you should have claimed. You do an annual adjustment to fix any differences. You write this adjustment in your books by putting the right entry for the extra VAT to claim or pay back. This makes sure your VAT numbers be right for the year and you follow the vat rules.

Retention & housekeeping

• Keep all things for at least 6 years.
• Put files by car and by VAT time. This helps you find the right invoice for your VAT return fast.

BIK rules from 2025 onward: what’s changing (UK)

Zero-emission EVs:

• 2024/25: 2% BIK (reference point).
• 2025/26: 3%, 2026/27: 4%, 2027/28: 5% (going up by 1 percent each year).
• The government has said there will be further rises after these years. You need to plan your next replacement cycle while keeping these yearly increases in mind.

Other CO₂ bands:

• Most bands will go up a little in 2025/26, and the top one will be 37%. After that, these bands do not change for some time. You should always check the latest tables before you order—the schedule could change if there are new Budgets.

Why this matters

• Directors and workers who use a company vehicle for personal use need to think early and look at how this can change their take-home pay over time. If you pick an electric vehicle, even if BIK goes up, it is still lower than many ICE models. So, picking options like salary-sacrifice, BCH, and Business PCP on an electric vehicle can help make cash flow better and improve tax efficiency. This is good for most people who want a company vehicle.

Quick EV BIK illustration (not advice)

• P11D for a £35,000 electric car; the BIK rate for 2025/26 is 3%. This means the amount you pay tax on will be £1,050.
• If you pay tax at 20%, you will pay about £210 each year (about £17.50 every month).
• If you pay tax at 40%, you will pay about £420 each year (about £35 every month).
  What you pay depends on the tax band you are in and the P11D value. It is good to get real quotes before you decide what to do.

Road tax, business mileage and charging points (2025/26 updates)

• Road tax (VED) for EVs: From April 2025, most electric cars will need to follow the standard road tax rules. You will pay for the first year, then pay the standard road tax again each year after that. Make sure you include this cost when you think about your business expenses.
• Advisory Electricity Rate (AER): At this time, HMRC’s AER for every mile in a fully electric car is 7 pence. You can use AER to pay back staff for business mileage. If you use the AER as the guideline, there is no extra tax or NIC to pay. These rates can change, so it is good to keep checking HM Revenue & Customs news and keep detailed mileage records.
• Charging point capex: If you put money into charging point equipment, you may now get 100% first-year allowances. The rules have changed to improve tax efficiency and help with your cash flow. This is good for any business thinking about charging point upgrades, but always check the current dates before you make plans.

Practical tax-efficiency playbook (business use vs personal use)

• Pick the right product for cash flow: If you want to keep your payments low every month, BCH or Business PCP may work best for you. HP or Lease Purchase is good if you plan to keep the car for a long time. Always compare car finance choices before you make a move.
• Document the use of the car: When there is any personal use—like driving from home to work or taking kids to school—there will be a BIK for employees or directors. You need to keep detailed mileage records and pick the right way to get money back, either the fuel rate or AER for EVs.
• Charging strategy: Putting in a charging point at work can help cut down waiting and get more people to use EVs. Think about hardware grants, capital allowances, and the kind of electricity deals you can get when setting up the charging point.
• Corporation tax impact: Rentals like BCH or a finance lease, and the mix of depreciation and interest (on HP or Lease Purchase), will show up in a different way for corporation tax. It’s good to ask your accountant which way can give you the best tax benefits for you and your work.
• Paying costs: Pay your costs with the business account when you can. Try not to pay for running costs using a credit card with a high APR, unless you are sure you can pay back the full bill each

What lenders ask from self-employed applicants

Underwriters want to see a few main things. They look at if you can make the payments. They check if your income stays the same. They also look at what risks there may be.

• ID & business proof: You have to give a photo ID. You also must give something that shows your business is running. A sole trader can use a UTR. A limited company needs to send its incorporation papers.
• Income evidence: You should share your business bank statements for the last 3 to 6 months. You also have to give your most recent tax returns or your accounts. SA302s can be used for this.
• Trading history: A lot of places want to know that your business has been working for 12 to 24 months. If your business is new, some “new-start” programs can help. These usually ask for a personal guarantee.
• Credit: They will look at your credit score and your business credit score. If your record has any bad marks, you need to explain them.
• Vehicle policy: There are rules for the age and mileage of the car. PCP or BCH deals are only for cars that are newer and have lower mileage.

Ways to strengthen approval

• Make a deposit or choose a part-exchange to lower the LTV.
• Choose a term that fits. Make it long enough, so you can pay, but not longer than the car’s life.
• Keep the business account organised for 90 days. Do not take out large amounts of money that you cannot show a reason for.
• If money is tight, think about rentals that include maintenance.

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Worked numbers (illustrative—not a quote)

The price for this is £28,000. You need to pay a deposit of £3,000 at the start. The time for the deal is 36 months. The representative APR is 9.9%.

A) Business PCP vs HP

PCP can help to lower your monthly payments. It also gives you choices at the end of the deal. With HP, the monthly payments are higher. But you will own the car at once, and you will not have extra handback charges to think about.

B) BCH vs Finance Lease

Always get written quotes from at least two providers. Take some time to compare car finance options before you decide.

Mileage, wear and the end-of-term bill (business edition)

• PCP/BCH: You pick your yearly mileage at the start. If you go over this, you pay for each extra mile at the end. If you return the car with damage that is worse than the BVRLA fair wear and tear, you will get a bill. Many funders let you raise your mileage limit while you are in your term. It is often better to do this than to pay a big fee later on.
• Preparation: Keep both keys. Hold onto the full service history. Keep the charging point cable if you have an electric car. Change tyres that are almost worn out and fix any small chips in the windscreen early on. You should make sure that any warning lights are fixed before the inspection.
• Resale reality: If you drive more than the mileage you picked, the value of the car may be lower. You should plan for how you will finish or change your deal at least six months before the end.

Handback prep checklist

• The car comes with a full service history. All the stamps and receipts are included with it.
• Both keys are with the car, and both of them work.
• The tyres still have at least 1.6 mm tread left. The two tyres on the same axle are matched in type.
• Any chips in the paint have been fixed. All of the lights work the way they should. No warning lights are on.
• The wheels have been fixed with a smart repair if there were big marks from the curb.
• The inside of the car is clean. The parcel shelf or the load cover is fitted.
• The EV cable is in the car. Manuals, the locking nut, and the SD or nav card come with it.
• Photos taken in daytime show the car from every angle. A clear picture of the odometer is also included.

Electric vehicles for business: where each product fits

• BCH: A lot of people like to use this because the BIK rate is low. It can make it simple to set and stick to a budget. BCH is a good option for fleets that want to get the same specs and the same mileage on all of their cars.
• Business PCP: This gives you a lot of choice at the end of the term. It helps people who feel unsure about how much EVs will be worth later on. You can just give the car back if used-car prices go down.
• HP/Lease Purchase: Choose this if you want to own the car for a long time. It will help you keep running costs low. This works well if you do not drive a lot of miles each year, or if you want to add special wraps or other parts to the car.

Sector notes: taxi/private-hire and high-milers

If you work as a taxi driver or private-hire driver, you need to choose quotes that match the mileage you drive each year. This is true if you work by yourself or run the company. Use the bik rate when you look at costs. Compare what you pay to use an electric car to what you pay for a petrol or diesel car in your town or city. Look at the prices for fuel or energy, insurance, tyres, and service costs where you live. If you work for someone, remember to read your company’s pay-back rules. Make sure you count how much time you take off and the way you use your car for business too when you make your plans for the year.

Risk control: cash-flow, end-of-term and resale

1. Plan for the full cost, not just each month. You need to add up the full cost of things like tyres, servicing, VED road tax, insurance, and any end fees if you plan to give the car back.
2. Get ready for the end ahead of time. When you have about six months left on your deal, check your mileage. Look at how the car is doing and what it could be worth. Decide if you will give the car back, swap it, keep it, or get new finance.
3. Look at different choices. Get two price estimates and two finance offers. Then compare car finance. Look at the APR, fees, mileage, and what you have to do at the end.

Decision worksheet (print-friendly)

• Say why you need the car and let us know your planned annual mileage or how you will use of the car.
• Pick if you want ownership of the car (HP/Lease Purchase) or if you want to use & return it (BCH/Finance Lease).
• Set your budget for monthly repayments. Add what you will pay for maintenance, tyres, and insurance.
• Find out about your VAT and capital-allowance. You can talk about this with your accountant to get advice.
• Get two quotes for the same car so you can compare car finance deals.
• Choose what you want to do at the end: keep the car, part-exchange it, or return it.

Correct as of 14 August 2025

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