Car Leasing in the UK Explained: PCH, PCP, and Business Lease

Car leasing has become one of the most popular ways to get a new car in the UK. Around half of all new cars in the UK are now leased rather than bought outright. But leasing can be confusing, with different types of agreements, hidden costs, and restrictions that are not always obvious upfront.

This guide explains the three main types of car lease available in the UK, how monthly payments are calculated, and what you need to watch out for.

What Is Car Leasing?

Leasing is essentially a long-term rental. You pay a monthly fee to drive a car for a fixed period (typically 2–4 years), and at the end of the contract you hand it back. You never own the car. In return, you get a brand-new car with a warranty, and you do not have to worry about depreciation.

The Three Main Types of Lease

PCH (Personal Contract Hire)

PCH is the simplest form of leasing. You pay an initial rental (usually 3, 6, or 9 monthly payments upfront), followed by fixed monthly payments for the duration of the contract. At the end, you hand the car back. There is no option to buy.

PCH is ideal for drivers who want a new car every 2–4 years, want predictable costs, and do not mind never owning the vehicle. Road tax is usually included in the monthly payment, and you can add a maintenance package that covers servicing and tyres.

PCP (Personal Contract Purchase)

PCP is technically a finance agreement rather than a pure lease, but many people use it like a lease. You pay a deposit and monthly payments, but at the end you have three choices: hand the car back, pay a final balloon payment to own it, or use any equity as a deposit on your next car.

PCP monthly payments are lower than HP (hire purchase) because you are not paying off the full value of the car. However, if you hand it back, you must meet the mileage and condition requirements or face charges.

Business Contract Hire (BCH)

BCH works the same as PCH but is designed for businesses, sole traders, and limited companies. The key advantage is tax: businesses can reclaim 50% of the VAT on lease rentals (100% if the car is used exclusively for business) and deduct the full rental cost as a business expense against corporation tax or income tax.

How Monthly Payments Are Calculated

Your monthly lease payment is based on three factors:

1. The car's list price — Higher-value cars cost more to lease
2. Predicted depreciation — Cars that hold their value well (like BMWs and Toyotas) are cheaper to lease because the finance company loses less value
3. The interest rate (APR) — Built into the monthly payment but not always transparently quoted

A larger initial payment reduces your monthly cost but increases your upfront exposure. If the car is written off or stolen in month one, you could lose that initial payment (gap insurance can protect against this).

Mileage Limits

Every lease contract has an annual mileage limit, typically 8,000, 10,000, 12,000, or 15,000 miles per year. If you exceed this, you will be charged an excess mileage fee at the end of the contract — typically 5–15p per mile depending on the car.

On a 3-year lease, exceeding your limit by 3,000 miles per year at 10p per mile would cost you £900 at handback. It is essential to estimate your mileage accurately before signing.

What Is Included in a Lease?

• Always included: Road tax (VED), manufacturer's warranty, roadside assistance (usually)
• Sometimes included: Servicing and maintenance (if you add a maintenance package)
• Never included: Insurance, fuel, tyres (unless maintenance package), parking fines, congestion charges

Final Thoughts

Leasing can be a cost-effective way to drive a new car if you want predictable monthly costs, do not want to worry about depreciation, and are happy never owning the vehicle. However, it is not always cheaper than buying a used car — compare the total cost of leasing over 3 years against buying a 2–3 year old used car and selling it after the same period.

For a detailed comparison, see our guide: Leasing vs Buying a Used Car.