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Hire purchase vs leasing: choosing asset finance in 2026

Hire purchase vs leasing decides who owns the kit, who gets the tax relief and when the VAT falls due. The 2026 rule changes moved the goalposts.

Reading time 7 min read
Category Business guides
Written by The bizbritain team
Hire purchase vs leasing starts with one question. Do you want to own the asset at the end? Hire purchase means yes: you pay in instalments and the kit becomes yours. Leasing means you pay to use it, and ownership stays with the lender. Tax, VAT and accounting all flow from that split.
The old shortcuts have also just moved. New accounting rules and a new tax allowance both landed for 2026. This guide covers the five differences and the changes, in plain English.

Section 01

What the two products actually are

Hire purchase spreads the cost of an asset over fixed instalments. You run it from day one, and you own it at the end, usually for a small option fee. A balloon payment at the end can lower the monthly cost.
A finance lease funds the asset over most of its working life, but ownership never passes automatically. At the end you hand it back, extend for a small secondary rental, or share in the proceeds when it is sold on.
An operating lease or contract hire covers a shorter period. You pay for use, then hand the asset back. Maintenance is often bundled in.

Section 02

Hire purchase vs leasing: the five differences that matter

  1. Who ends up owning the kit

    HP ends with the asset on your side of the fence. A lease ends with it going back, extending, or being sold on. If the asset holds its value, owning matters. If it dates quickly, handing it back is the feature.

  2. What sits on your balance sheet

    The old line was that leasing kept debt off the books. For most companies that is no longer true. Under revised FRS 102, most leases go on the balance sheet for accounting periods beginning on or after 1 January 2026. Short leases under 12 months and low-value assets are exempt. Micro-entities reporting under FRS 105 keep the old treatment. Small companies using FRS 102 Section 1A do not: the new rules apply to them.

  3. Who gets the tax relief

    On HP you are treated as the owner once the asset is in use. That unlocks the Annual Investment Allowance, set at £1m since April 2023. Companies buying new plant can claim 100% full expensing instead. On a lease, the rentals are deductible and the lender claims the allowances. One change worth knowing: from 1 January 2026 a new 40% first-year allowance applies to new plant bought for leasing, under Finance Act 2026. Over time that should sharpen lease pricing.

  4. When the VAT falls due

    On HP the VAT is normally due upfront on the full asset price. VAT-registered businesses recover it on the next return, subject to the normal rules. On a lease the VAT arrives a slice at a time, on each rental. Cars are the exception. Buy a car on HP with any private use and the VAT is normally not recoverable at all. Lease it and you can usually reclaim 50%.

  5. Flexibility at the end

    HP suits kit you will still be using in year eight. Leasing suits kit you will want to replace in year three. Contract hire can bundle maintenance, which turns an asset into a predictable monthly cost.

Section 03

Which one is right for my business?

Buy on HP when the asset is long-lived, holds its value and earns its keep for years. Plant, machinery, trailers, ovens, racking.
Lease when the asset dates quickly, or when handing it back beats owning it. Vehicles, IT and anything with a strong resale market lean this way.
Cars deserve their own sum, because of the VAT rules above. For many VAT-registered businesses, leasing a car costs less than buying it on HP.
Then check the tax position against your own accounts. The right answer depends on your profits, your other allowances and your year end. Confirm it with your accountant before you sign anything.
This is one of the largest funding markets in the country. According to the Finance and Leasing Association, its members financed £40.3bn of equipment investment in 2025. That is around a third of UK investment in machinery, equipment and purchased software.
£40.3bnof equipment investment financed by FLA members in 2025
1 in 3pounds of UK investment in machinery, equipment and software is financed this way
£1mAnnual Investment Allowance, set permanently at this level since April 2023
40%new first-year allowance on new plant bought for leasing, from 1 January 2026

Section 04

Where we come in

Lenders specialise. Some price HP on plant keenly, and others live on vehicle contract hire. The same asset can price very differently across the market. Shopping that spread is the job of a broker.
bizbritain is an FCA-authorised finance broker with a panel of 100+ lenders. Asset finance sits inside our growth and asset finance panel. Tell us what you are buying and we will come back with the routes and the real costs.
Buying a van, or weighing rising running costs? Our van costs and finance plan looks at the vehicle decision. To keep kit purchases separate from day-to-day cash, see our autumn working capital plan for the property trades.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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