Lease Rental Restriction

Overview

Businesses leasing company cars can normally deduct qualifying lease rental expenditure when calculating their taxable profits.

However, HM Revenue & Customs (HMRC) restricts the amount of tax relief available on leased cars with higher CO₂ emissions.

For most cars acquired from April 2021, a 15% lease rental restriction applies where the vehicle produces more than 50g/km of CO₂ emissions.

This means that only 85% of the qualifying lease expenditure is deductible when calculating taxable business profits.

Fully electric cars and qualifying low-emission cars producing no more than 50g/km of CO₂ are generally exempt from the restriction.

The rules are relevant when comparing company car leasing costs, vehicle selection and different fleet funding arrangements.

Questions You May Ask

• What is the lease rental restriction for company cars?
• How much of a company car lease rental is tax deductible?
• Does the restriction apply to electric and plug-in hybrid cars?
• Does irrecoverable VAT form part of the calculation?
• Are maintenance charges subject to the restriction?
• Does the restriction apply to leased vans and commercial vehicles?
• How does the restriction affect the total cost of a company car?

How Does the Lease Rental Restriction Work?

Businesses can normally deduct qualifying vehicle leasing costs when calculating profits subject to Corporation Tax or Income Tax.

For most company cars acquired from April 2021, the amount deductible depends on the vehicle's CO₂ emissions.

Current Lease Rental Restriction

The restriction applies to qualifying lease expenditure rather than directly to the amount of tax payable.

For cars emitting more than 50g/km, 15% of otherwise allowable leasing expenditure must normally be added back when calculating taxable profits.

For example, where a company incurs £6,000 of qualifying annual car leasing expenditure, a 15% restriction means that £900 is disallowed and £5,100 remains deductible.

Historical Lease Rental Restriction Thresholds

The CO₂ threshold has changed over time.

The relevant dates differ slightly between Corporation Tax and Income Tax rules.

Earlier thresholds can remain relevant to cars acquired before the legislation changed. Businesses reviewing older contracts should therefore confirm the applicable rules rather than automatically applying the current 50g/km threshold.

Worked Example – Corporation Tax Impact

Consider a VAT-registered business leasing a company car that is available for private use.

Assume the vehicle produces 130g/km of CO₂, the monthly finance rental is £500 excluding VAT, and the business can recover 50% of the VAT on the leasing charge.

Assuming a Corporation Tax rate of 25%, the annual tax saving from the allowable deduction would be £1,402.50.

If the same leasing expenditure qualified for a full deduction, the tax saving would be £1,650.

The lease rental restriction therefore creates an additional annual Corporation Tax cost of £247.50 in this example.

The calculations are illustrative and assume the business is entitled to the stated VAT recovery and Corporation Tax relief.

Does the Restriction Apply to Maintenance?

Where maintenance costs are genuinely supplied separately from the car leasing service and separately identified within the agreement, they are normally excluded from the 15% lease rental restriction.

This means that the restriction generally applies to the qualifying vehicle rental element rather than separately supplied servicing, maintenance and repair charges.

For example, a fully maintained contract hire agreement might include:

• Finance rental: £500 per month.
• Separately supplied maintenance: £100 per month.

Where the 15% restriction applies, it would normally be calculated on the qualifying finance rental expenditure, including any relevant irrecoverable VAT, rather than the separately supplied maintenance costs.

The treatment depends on the contractual arrangements and how the supplies are structured.

How Does VAT Affect the Calculation?

VAT and the lease rental restriction are separate tax considerations, but they can interact.

VAT-registered businesses leasing company cars available for private use can normally reclaim 50% of the VAT charged on qualifying leasing rentals, subject to normal input tax recovery rules.

The remaining irrecoverable VAT forms part of the business's leasing expenditure.

Where the 15% lease rental restriction applies, it is generally calculated on the qualifying expenditure including irrecoverable VAT.

Businesses should therefore consider both the VAT treatment and the Corporation Tax implications when calculating the true cost of a leased company car.

For more information, see our VAT Rates and Thresholds guide.

Electric and Plug-in Hybrid Cars

Fully electric cars producing zero tailpipe CO₂ emissions are generally exempt from the 15% lease rental restriction.

Plug-in hybrid cars with certified CO₂ emissions of 50g/km or less are also generally exempt.

However, plug-in hybrid vehicles producing more than 50g/km normally fall within the 15% restriction.

The vehicle's certified CO₂ emissions should be checked before determining the applicable tax treatment.

The absence of a lease rental restriction is separate from the vehicle's Benefit in Kind tax treatment, which is calculated under different rules.

Does the Restriction Apply to Vans?

The car lease rental restriction does not normally apply to qualifying vans and other commercial vehicles treated as goods vehicles for tax purposes.

Businesses leasing vans for qualifying business purposes can therefore generally deduct the full allowable leasing expenditure, subject to normal tax rules.

However, vehicle classification is important.

Following changes effective from April 2025, most double-cab pick-ups are treated as cars for relevant direct tax purposes. Consequently, the car lease rental restriction may apply where the vehicle exceeds the applicable emissions threshold.

Businesses should check the relevant classification and any transitional rules when considering double-cab pick-ups or other vehicles that may be classified differently for VAT and direct tax purposes.

How Does the Restriction Affect Vehicle Funding?

Different funding methods can produce different tax outcomes.

Under qualifying contract hire and operating lease arrangements, the customer normally claims tax relief on allowable leasing expenditure, subject to the car lease rental restriction where applicable.

Where a business purchases a vehicle outright or uses qualifying hire purchase, capital allowance rules may apply instead.

Certain long funding leases are also subject to different tax provisions.

Businesses should assess the overall tax treatment of each arrangement rather than assuming that the lease rental restriction applies to every form of vehicle finance.

Impact on Your Business Fleet

The lease rental restriction can affect the Whole Life Cost of company vehicles and should be considered when comparing different models and funding options.

A car emitting more than 50g/km of CO₂ may produce a higher after-tax cost than a comparable lower-emission vehicle, even where the monthly leasing rentals are similar.

Fleet operators should consider:

• CO₂ emissions and the applicable lease rental restriction.
• VAT recovery and irrecoverable VAT.
• Corporation Tax relief on leasing expenditure.
• Vehicle Benefit in Kind taxation and employer National Insurance.
• Maintenance costs and vehicle operating expenses.
• Funding arrangements and overall Whole Life Cost.

LetsTalkFleet provides independent fleet consultancy to help businesses compare vehicle funding options and understand the financial implications of different company car policies.

Our services include Whole Life Cost analysis, contract hire comparisons, fleet policy reviews and tax-efficient vehicle selection.

LetsTalkFleet can drive efficiency in all areas of Fleet Operations and ensure optimisation is impactful and long lasting, contact us via our website or speak to one of our friendly consultants today on 0330 056 3335 or [email protected] .

HMRC – Car Lease Rental Restrictions

HMRC – Calculation and Maintenance Treatment

HMRC – Vehicle Classification and Exceptions

HMRC – VAT on Motoring Expenses