Leasing vs PCP for business owners: Which is better?
Running a business means that you have to make important decisions at times. How you fund your vehicles is one of those decisions.
Whether you’re operating as a sole trader or run a growing limited company, the choice between leasing and personal contract purchase (PCP) can affect factors such as cash flow, tax requirements and day-to-day operations.
Choosing the wrong financial structure can leave you with unexpected bills at the end of a contract. This is why it is important to have a strategy that can keep your team mobile without compromising your balance sheet.
Choosing the right finance structure for your business
When it comes to car finance, you’ll be selecting between leasing and PCP. Your choice is vital for shaping how your business handles costs, risk and long-term planning.
Leasing is also known as a business contract hire. It is where you pay for the use of the vehicle rather than its full value. It means fixed monthly payments, which makes budgeting more straightforward, and is suitable if you like to refresh your fleet every few years.
PCP can offer the possibility of ownership at the end of the agreement via a balloon payment. This choice is better suited for those who prefer to keep their vehicles for longer.
Your choice hinges on how central vehicles are to your operations, how much financial certainty you value, and whether you want exposure to future vehicles values.
Cash flow and budget planning
Leasing generally offers lower monthly payments, as you are only funding the usage of the vehicle, rather than its full value. With this type of structure, it supports a steadier cash flow and frees up working capital for stock, staffing or marketing.
PCP usually requires a deposit and higher monthly payments. The deferred final payment however can offer some breathing room if cash is tight later.
Evaluate each option carefully by seeing how each option can affect your monthly outgoings and decide which structure works best for leaving your business more resilient when income fluctuates.
Tax efficiency and business benefits
The tax benefits you can claim depend on the vehicle’s CO2 emissions and the finance structure you choose. Leasing can offer tax advantages for many business users. Depending on whether the vehicle is used solely for business, you may reclaim some or all of the VAT on the monthly payments, often offsetting corporation tax commitments.
PCP can still deliver tax benefits in the first year through First Year Allowances, particularly for electric vehicles, which is helpful if you want to offset taxable profits. However, at the end of the contract, the value of the car and whether you choose to buy it can create tax implications.
To help you here, have a conversation with your accountant to calculate the Total Cost of Ownership (TCO) for both an EV and a combustion model. This will give you a professional perspective that allows you to weigh up your options against your business structure and car use patterns before you commit.
Flexibility, mileage and wear and tear constraints
For leasing contracts, you’ll need to consider mileage limits and strict standards for condition at return. This can feel restrictive if your business covers long distances or operates in demanding environments.
This is why PCP tends to be the option that offers you more freedom, as you become in control of what happens to the vehicle at the end, including being able to sell it privately or keep it for longer.
Review your typical annual mileage and how intensively your vehicles work before you decide. One practical step is to compare your last two years of mileage records against the proposed limits set in the agreement.
There are several factors to consider before you commit to a car finance contract. Every business is different. It’s worth seeking guidance from your accountant and taking the time to establish what’s best now and in the long run.
