Buying a car for your business can be a big decision. Whether you are a sole trader, company director or run a growing business, there are several things to think about before choosing your next vehicle to ensure it is cost-effective and tax efficient.
On face value, you might look at the cost of the car – but you also need to consider how you will pay for it, how much it will cost to run and what tax rules could apply.
What will your business car be used for?
The first thing to consider is how much you will use your business car for work. Will you use it to visit customers, travel between different workplaces or carry equipment? You may also use the car for personal journeys, which can affect the tax treatment.
If you are self-employed, HMRC allows simplified mileage expenses in certain circumstances. For the 2026/27 tax year, the rate for cars and goods vehicles is 55p per business mile for the first 10,000 miles, falling to 25p for every mile after that.
Keeping a record of your business mileage is therefore important.
Should you buy or finance a car for your business?
You do not have to buy a business car outright. Finance can help spread the cost over several months or years. Depending on your circumstances, you could look at options such as hire purchase, PCP or leasing.
The rate you pay may reflect on different offers, times of the year, comparisons, deposits and credit profile. Those looking to buy a car with bad credit, may be subject to paying higher rates or may not be approved for finance at all.
The right option will depend on your budget, how long you want to keep the vehicle and how many miles you expect to drive.
Do not focus only on the monthly payment. Look at the total amount payable, interest rate, deposit, mileage limits and any final payment before signing an agreement.
What about tax for a business car?
One potential benefit of having a business car is the tax relief that may be available.
Businesses can claim capital allowances on cars bought and used for business purposes. The amount that can be claimed depends on factors including the type of vehicle and its emissions.
Electric cars can be particularly attractive from a tax point of view. Certain new and unused electric cars can qualify for a 100% first-year capital allowance, allowing the full cost to be deducted from taxable profits in the year of purchase.
Tax rules can be complicated, so speaking to an accountant before buying could help you understand what applies to your business.
Business car – is it better to use a business lease or personal lease?
Leasing can be an alternative to buying a business car, but you need to decide whether a business lease or personal lease is more suitable.
A business lease may be useful if the vehicle is being used mainly for work and the business is paying for it.
A personal lease is taken out in your own name, meaning you are personally responsible for the agreement. In fact, personal leases are eligible for historical car finance claims – but business leases are not. If you purchased a vehicle for personal use between 2007 and 2021, you may be eligible for compensation, even if you no longer own the car, worth on average £829 per vehicle.
VAT can also be an important consideration for VAT-registered businesses. For many leased cars, HMRC says only 50% of the VAT on the lease payments can normally be recovered where there is private use. Different rules can apply depending on how the vehicle is used.
It is therefore worth comparing the total cost of both options rather than assuming a business lease will automatically be cheaper.
What about company car tax?
If you run a limited company and provide a business car to yourself or an employee, company car tax may also apply.
HMRC says private use of a company car, including commuting, can create a taxable benefit. The amount depends on factors such as the car’s value, fuel type and CO2 emissions.
This means choosing a lower-emission vehicle could potentially have tax advantages.
It is worth checking the tax position before deciding which car is right for you.
Think about running costs of a business car
The purchase price or monthly payment is not the only cost to consider.
Insurance, servicing, tyres, fuel, vehicle tax and repairs can all add up.
If you are comparing two cars, look at the expected cost of running each one over the time you expect to keep it.
For businesses covering a high number of miles, fuel economy can make a significant difference to the overall cost.
Getting the numbers right when buying a car for your business
A business car can be an important tool for running your company, but it is worth taking your time before making a decision.
Think about how you will use the vehicle, how you will pay for it, the tax implications and its expected running costs.
If you have bad credit, there may still be finance options available, while anyone who has previously used car finance may also want to check whether they could be affected by the ongoing car finance claims process.
Most importantly, compare your options carefully. A car that looks affordable because of a low monthly payment may not necessarily be the cheapest option overall.
Taking the time to understand the full cost of your business car could help you make a better financial decision for your business.
