A company car for employees: finance lease or hire purchase?
Yes. A limited company can get a car for an employee on a finance lease, or buy one on hire purchase. This guide puts the two side by side, in plain words.
Our team are finance brokers in Scotland, working across the whole UK. This guide is for limited companies only. It is general information, not tax advice. We do not recommend one way over another. Take advice from a qualified accountant or tax adviser.
Is the car for you, the director? Read A director's company car.
Can a limited company get a car for an employee?
Yes. The company gets the car and pays for it. The employee drives it. The company can use a finance lease, or hire purchase. Each is taxed in a different way.
If the employee can use the car for private trips, it is a taxable benefit. This is known as a benefit in kind. That includes driving to and from work. Then the employee pays tax on the car. How much depends on the car's price and the type of fuel it uses. The company reports it to HMRC on form P11D. It also pays employer National Insurance on it. GOV.UK sets out what to report and pay.
Why let your employee choose their own car?
Years ago, many companies had a fleet manager. Staff often got to choose their own company car. Some company car schemes still work this way. Here is how it can work.
- You set the rules: the budget, and the kind of car that fits.
- We get finance approved for the company, up to the budget you set. Approval is not certain.
- Your employee goes out and finds the exact car they want, within your rules.
We have worked with companies that do this. They tell us their staff really value it. It feels very different from being handed a list, or a car someone else picked. The employee sees the car as their own choice, so they are more likely to look after it. And those employers see it as a good way to keep good staff.
What does a finance lease through the company mean?
On a finance lease, the company pays a set amount each month to use the car. The company does not own it.
| What | On a finance lease through the company |
|---|---|
| Who pays | The company pays each month. |
| VAT | The employee may drive the car for private trips too. Then the company can usually get back half the VAT. The other half is a cost. |
| Profits | The payments are usually set against the company's profits. Cars with higher emissions can lose part of that. Check the rules. |
| At the end | Usually, you keep using it for a small yearly rental until it is sold or scrapped. |
Read GOV.UK on VAT on cars.
Can a limited company buy a car for an employee on hire purchase?
Yes. The company pays a deposit, then monthly payments. After the last payment, and any balloon (a bigger last payment), the car belongs to the company.
| What | On hire purchase through the company |
|---|---|
| VAT | The company usually cannot get back the VAT if the employee drives the car for private trips too. |
| Profits | The company gets tax relief on the car's cost instead. Ask your accountant how this works for you. |
| At the end | The company owns the car. |
On hire purchase, the company is tied to every payment, and pays interest. If payments stop, the lender can take the car back.
Finance lease or hire purchase: what is the difference?
On hire purchase, the company owns the car at the end. On a finance lease, it does not.
| What | Finance lease through the company | Hire purchase through the company |
|---|---|---|
| Who pays | The company. | The company. |
| VAT back | Usually half, with private use. | Usually none, with private use. |
| Tax for the employee | Yes, with private use. | Yes, with private use. |
| At the end | A small yearly rental, usually. | The company owns it. |
Your own figures are for you and your accountant.
What if the car is only for work?
A car only for work can usually be a pool car, with no tax for the employee. It is shared by employees for work trips. It is normally kept at your premises. It is not used for private trips. Read GOV.UK on what is exempt.
Should I get finance before I order the car?
Yes. Talk to us before you place an order with the dealer. Ask us to get finance approved for the full price of the car you want. Approval is not certain. Then the money is there, even with no discount.
You can buy from any dealer you like. But some dealers will only invoice their own finance partner. You may need a dealer who will invoice your lender.
What happens if the employee leaves?
The car belongs to the company, or is leased by it. So the finance carries on. The car can go to the next employee, or be kept as a pool car. Plan for this before you hand over the keys.
Frequently asked questions
Can a new limited company get a car for an employee?
Often, yes. A lender may ask for a deposit, or for a director to sign a personal guarantee.
Can the company finance more than one car?
Yes. Each car can have its own finance. Ask us about the cars you need.
Is a company car for an employee tax deductible?
Ask your accountant.
Does applying affect my credit score?
No. Applying to us does not affect your credit score. With your OK, our team then runs a light credit check, often known as a soft search. A lender may run its own checks later.