Car Leasing Explained: The Complete Guide to Hassle-Free Driving
Business car leasing has become a £22.1 billion industry in the UK (2025), offering companies tax-efficient vehicle access with minimal capital expenditure, only requiring initial payments of 3-12 months compared to full vehicle purchase.
Companies can reclaim 50-100% of VAT on lease payments (depending on business/personal use) and offset monthly payments against taxable profits as business expenses, creating significant tax benefits while preserving cash flow.
Unlike outright purchase, business leasing protects against vehicle depreciation and includes options for maintenance packages, road tax, and comprehensive coverage, creating predictable fixed costs for better financial planning.
The way we drive is changing. With rising vehicle prices (up 42% since 2019 according to Auto Trader) and environmental concerns, many UK drivers are moving away from traditional car ownership towards more flexible options. Car leasing has emerged as a popular alternative, with a substantial increase in personal contract hire agreements over the past five years according to the BVRLA.
Electric vehicles now represent over 19% of new car registrations in the UK as of March 2025, with over 1.4 million registered EVs on UK roads. This growth has been supported by the expansion of the UK's charging network, which now exceeds 75,000 public chargers across the country.
This comprehensive guide explains everything you need to know about car leasing, from how it works to whether it's the right choice for you - including what you should consider when leasing an EV through a salary sacrifice car scheme, which can save employees up to 50% on vehicle costs through income tax and National Insurance savings while being free to run for companies.
What Is Car Leasing?
Car leasing is essentially a long-term rental agreement that allows you to drive a new vehicle for a fixed period without actually owning it. You pay a monthly payment to a leasing company to use the car for an agreed contract term, typically between 2-5 years.
The leasing company retains ownership of the vehicle throughout the contract period. At the end of your agreement, you simply return the car - although some agreements offer a purchase option at the end of the lease (notably, PCP agreements).
The cost-effective nature of leasing is based on the concept of depreciation. When you lease, you're only paying for the vehicle's depreciation during your contract period, not its entire value. This makes monthly payments significantly lower than traditional finance options where you eventually own the car.
Different Types of Vehicle Leasing Explained
The UK leasing market offers several options to suit different needs:
Personal Contract Hire (PCH)
PCH is the most straightforward form of car leasing for individual drivers. Under this type of agreement, you pay an initial deposit (typically 3-9 months of rental), and commit to making fixed monthly payments for the duration of your contract, with road tax being typically included. The car is returned at the end of the term and you never own the vehicle.
PCH is popular for those wanting a simple, transparent leasing experience with predictable costs. It is great for drivers that want to drive new cars, and upgrade somewhat regularly to keep up with the latest tech, and safety features.
Depending on the leasing company, you may have the option to include extras, like maintenance, tyres, MOT’s, and breakdown cover.
Personal Contract Purchase (PCP)
While technically a finance product rather than pure leasing, PCP offers similar benefits to a lease, with the key difference being the end-of-term. Like a PCH, you start the contract term with a deposit, followed by monthly payments.
At the end of the agreement, you have three options
Return the car (like traditional leasing)
Pay a final "balloon payment" (based on the car's residual value) to own it
Use any equity to start a new agreement
PCP offers more flexibility at the end of the contract but typically requires a credit check with stricter criteria.
Business Contract Hire (BCH)
BCH works similarly to PCH but is designed specifically for companies and offers tax advantages for businesses. Companies can usually reclaim some VAT on monthly payments , claim monthly rentals as a business expense, include fleet management services, and benefit from additional policy perks such as the inclusion of road tax, maintenance, MOT, tyres, and breakdown cover.
BCH is ideal for businesses looking for comprehensive, budget-friendly fleet solutions with fixed-term costs.
Hire Purchase (HP)
Technically not leasing but worth mentioning for comparison, HP is a loan tied to the vehicle in question. This will incur higher monthly payments than leasing, but you will own the vehicle at the end with no large final payment.
Unlike PCH, PCP, or BCH, there are no mileage allowance restrictions, but you will have full responsibility for maintenance after the warranty period.
Salary Sacrifice Schemes
A particularly cost-effective option for leasing electric vehicles is through salary sacrifice car lease schemes. When a company signs up to offer EV Salary Sacrifice as a company benefit, eligible employees will then be able to "sacrifice" part of their gross salary in exchange for a new car.
This will reduce income tax and National Insurance contributions of the business and employee, as payments are made out of gross, or pre-tax salary. This offers significant savings of 20-50% on the cost of the lease, depending on the employees salary, and the chosen car. When coupled with a low BiK of 3% in 2025, EVs are particularly tax-efficient.
Salary sacrifice schemes - like The Electric Car Scheme - provide an all-inclusive package with tyres, MOT, breakdown cover, and maintenance included. There is an option to bundle in comprehensive insurance, and a home charger.
The Leasing Process Step-by-Step: for PCP and PCH
Initial Application and Credit Checks
The leasing process begins with an application form and credit check to assess your financial reliability. The leasing company or broker will verify your credit and address history, employment status, and income.
Unlike purchasing with finance, leasing typically requires a good to excellent credit score as the leasing company takes on more risk.
Choosing Your Vehicle and Specification
Once approved, you can select your make and model, specs and trims, optional extras, and the colour and finish of your car.
Many lease brokers offer the full range of vehicles from standard petrol and diesel models to the latest electric car options. For those interested in EVs, salary sacrifice schemes through an electric car scheme provider can make premium electric vehicles remarkably affordable.
Setting Your Contract Terms
You'll need to agree to:
Contract length: Typically 2-5 years (3 years is most popular)
Annual mileage allowance: Usually between 5,000-30,000 miles per year
Initial payment: Larger upfront payments reduce your monthly costs
Be realistic about your mileage needs - exceeding your allowance can result in excess charges of 5-15p per mile.
Vehicle Delivery and Collection Process
Once your leasing contract is signed and processed, the dealer or leasing company will order your vehicle (if not from existing stock), and you will receive your delivery date.
The car will undergo pre-delivery inspection, and the car will be registered if new.
Your car will be delivered to either your home or work address, and some providers make it mandatory to be present for delivery.
End of Contract Procedures
When your agreement ends, the leasing company will contact you about collection. You will be able to arrange for a new lease if you want to continue driving a new vehicle.
All leased vehicles are assessed against industry standards, typically using the British Vehicle Rental and Leasing Association (BVRLA) guidelines which cover:
Bodywork condition
Interior condition
Mechanical condition
Tire wear and damage
Presence of all original equipment
Service history verification
Fair Wear and Tear Expectations
"Fair wear and tear" refers to the reasonable deterioration a vehicle experiences during normal use. This includes:
Minor scratches (under 25mm)
Light interior wear on high-contact points
Normal tire wear (with legal tread depth)
Small stone chips to windscreen or paintwork
Damage exceeding these guidelines may result in charges.
What's Included in a Car Lease?
Your monthly payment typically covers vehicle depreciation during your contract, interest charges (sometimes called "finance charges"), and the leasing company's profit margin.
Most leases include road tax for the duration of the agreement, manufacturer warranty coverage (typically 3-7 years depending on the manufacturer), and the OTR (on the road) fees, plus delivery.
There are optional extras, and for a more comprehensive package, you may be able to add:
Maintenance packages: Covering servicing, repairs and wear items like brakes and tyres
Gap insurance: Protects you if the car is written off and the insurance payout doesn't cover the remaining lease value
Breakdown cover: Roadside assistance and recovery services
Early termination protection: Insurance against unexpected circumstances requiring you to end the lease early
What's NOT Typically Included
You'll still need to arrange insurance, with comprehensive coverage being mandatory for most leases. In addition, fuel or charging costs will remain your responsibility - alongside parking permits/ congestion charges.
Windscreen cover may not be included - even if you have a maintenance package. You need to ensure this is covered to avoid extra fees.
Pros and Cons of Car Leasing
Advantages
Leasing a car comes with several advantages - such as potentially lower monthly payments over other finance options (HP, personal loan).
You will get to drive a new car every few years, keeping up with the latest tech and safety features, as well as maintaining a cleaner, more refined driving experience.
You will have fixed monthly costs, making it easier to budget, whilst avoiding the risk of unexpected expenses, or car depreciation. Leases will also have reduced upfront costs when compared to purchasing a car outright.
Inclusive packages may cover road tax, warranty, and maintenance - but you need to check with your lease provider to verify the specifics.
Disadvantages
If owning your car is important to you, it is worth being aware of the fact there is no automatic ownership at the end of the lease. PCP agreements offer the option to buy the car at the end of the contract - but you will be responsible for paying the rest of its value.
There will likely be mileage restrictions - with annual mileage being pre-agreed at the start of your contract. In addition, wear and tear chargers may be applied if the vehicle is not maintained correctly, or is modified.
There may be early termination fees, and opting into a lease is an ongoing commitment - with monthly payments throughout the contract period, as well as commitment for the length of the contract.
Personal vs. Business Leasing (PCH vs BCH)
There are some differences between personal and business leasing. In a personal lease, the contract is signed by the individual, whereas in a business lease - it is signed by the company.
VAT reclaim is not possible on a personal lease, but businesses may be able to reclaim depending on the use case - with additional tax benefits from allowable expenses being added to the savings.
The individual application process is simpler - with businesses facing more complex accounting requirements, VAT treatments, and product tailoring options.
Salary Sacrifice for Company Cars
For employees, choosing between a traditional lease or salary sacrifice can make a substantial difference to the overall cost.
Salary sacrifice schemes provide significant tax savings via income tax and National Insurance reductions. Salary sacrifice scheme providers may offer all-inclusive packages covering insurance, maintenance and breakdown cover.
For electric cars, the cost benefits for employees are multiplied, with ultra-low 3% BiK rates (up to 37% for petrol/diesel leases) - as well as 20-50% savings on the overall lease when compared to non salary sacrifice products.
The process is regulated and transparent when using compliant providers like The Electric Car Scheme.
Is Car Leasing Right For You?
Car leasing works best for drivers who prefer driving newer vehicles with the latest technology, have stable finances and predictable mileage needs, and want fixed, budget-friendly monthly costs.
As an added benefit, these drivers will not need to worry about the hassle of selling a car or worrying about depreciation.
For those interested in electric vehicles specifically, combining leasing with a salary sacrifice scheme provides the most cost-effective path to sustainable driving, with significant cost savings, tax efficiencies, and all-inclusive packages.
Whether you're considering your first lease or comparing different options, understanding the complete leasing process ensures you can calculate costs accurately, negotiate confidently, and drive away with a customisable agreement that perfectly matches your needs and budget.
Last updated 11.04.25
