Changing your car?

How do you finance the purchase?

Firstly, from a tax perspective and specifically for capital allowances purposes, allowances are only available on purchases funded by cash (outright purchase), personal loans or hire purchase (HP). The amount of capital allowances available depend on the cost of the car and the C02 emissions of the car.


You can differentiate between HP, leasing and Personal Contract Purchase (PCP) by looking at the instalments:


With HP contracts the amount outstanding is usually spread over equal instalments over the term, sometimes the final instalment can be larger than the others.

With Lease instalments VAT is shown separately and added to the monthly instalment.

PCP contracts have a balloon payment at the end, with an option to purchase.
Below is a summary comparing the most common ways of financing a car:


But which option is best for you?

Pay Cash

Advantages: The simplest and cheapest way to buy in the long term. No monthly repayments. Less paperwork to fill in. Capital allowances are variable at 100%, 18% or 8% depending on the C02 emissions of the vehicle.

Disadvantages: You must pay the full cost upfront. It could mean spending savings and losing interest. Services costs not included.


Personal Loan

Advantages: Spreads the cost over time. You own the vehicle. Lots of deals available from a wide range of lenders. Again capital allowances are available at 100%, 18% or 8% depending on the C02 emissions of the vehicle. Interest is allowable as an expense.

Disadvantages: The loan often needs to be within set parameters. Difficult to obtain with a poor credit rating. Service costs not included.


Personal contract purchase (PCP)

Advantages: Low monthly payments – you are hiring the car for most of the deal, with the option to buy at the end. You can get a new car whenever it suits you – even every year. Competitive deals. The rental costs are an allowable expense.

Disadvantages: Mileage limits will apply. There will be a ‘Balloon’ payment at the end of the contract. Service costs unlikely to be included.


Advantages: Monthly payments are low. Servicing is often included. It’s easy to change cars, with no need to buy or sell. Lease payments can be included as an expense.

Disadvantages: You don’t own the car, no matter how long the lease. A large upfront deposit is usually required. There may be a mileage limit – with penalties if you exceed it.


Always consult with your accountant before changing your car. From a tax and a cash flow perspective the C02 emissions need to be checked, car manufacturers have, from our experience, been known to get these wrong. To ensure the calculations balancing capital and expense costs against cash flows stack up for you, to enable you to make an informed decision on expensive transactions.


For more information on the topic, please contact 01772 821 021.

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