Hire purchase vs finance lease: a full guide

In 2024, UK asset finance new business reached a record £39.7 billion, up 3% on 2023, reflecting sustained demand for both hire purchase and leasing arrangements according to Finance & Leasing Association (FLA). Yet understanding which structure best suits your cash flow, tax position and balance sheet is critical to maximising value and flexibility.

What is hire purchase?

Hire purchase allows you to pay for an asset in instalments, typically starting with a deposit of 10-20% of its value, followed by fixed monthly payments covering cost, interest and fees. Legal ownership remains with the finance provider until the final payment, when you usually pay a nominal fee to take title. 

From day one, the asset and corresponding liability appear on your balance sheet, and you claim depreciation as well as interest deductions in your profit and loss account. This dual recognition can be especially attractive for companies seeking to optimise taxable profits over the asset’s useful life (often three to seven years).

Hire purchase works well when you intend to keep equipment long-term. For example, if you purchase a £100,000 CNC machine on a five-year hire purchase with a 10% deposit, your balance sheet immediately reflects a £100,000 asset and a £90,000 liability. Year one could yield £20,000 in depreciation and £5,000 in interest deductions, reducing your taxable profit by £25,000.

Key mechanics

• Deposit + fixed instalments ensure predictable budgeting

• Full asset cost plus finance charges spread over term

• Final payment transfers legal title

What is finance lease?

A finance lease resembles hire purchase in economic terms: you enjoy the benefits and bear the risks of ownership, while the lessor retains legal title. Lease payments cover most of the asset’s fair value over a term closely matching its useful life. At the lease end, you often have the choice to buy the asset at a bargain price, return it, or negotiate a new lease.

Under IFRS 16 (Leases), a finance lease requires recording a right-of-use (ROU) asset and lease liability at the present value of lease payments. You then depreciate the ROU asset – typically on a straight-line basis – and recognise interest on the lease liability separately, resulting in a front-loaded total lease expense. 

This structure maintains the balance-sheet transparency introduced by IFRS 16 and UK GAAP, while preserving operational flexibility: you can upgrade equipment more frequently without disposal hassles.

Finance leases suit businesses that prioritise cash flow preservation, rapid technology cycles, or off-balance-sheet treatment under older accounting frameworks. Many providers offer fully maintained leases, bundling both service and insurance into monthly payments for simplified asset management.

UK market trends and recent statistics

The UK asset finance market – which includes hire purchase and finance leasing – continued its strong performance through early 2025. Total new business in 2024 hit £39.7 billion, a 3% increase on 2023 and the highest-ever annual total. December 2024 alone saw new business grow by 7% year-on-year, driven by gains in commercial vehicle and plant and machinery finance.

In February 2025, overall asset finance new business was up by 1% compared with February 2024, underpinned by a 35% surge in IT equipment finance and a 2% rise in plant and machinery finance. The first quarter of 2025 ended with total new business 5% higher than in Q1 2024, and March alone delivered an 11% year-on-year increase – the highest March figure in two years.

Despite strong headline growth, sub-sector performance varied. New car finance dipped by 4% in December 2024, while commercial vehicle finance edged up 14% for the full year. Lending to SMEs accounted for £23.5 billion of 2024’s total, highlighting asset finance’s role in supporting smaller businesses.

Pros and cons

Hire purchase Choosing hire purchase ensures eventual ownership and enables full depreciation and interest deductions. You lock in fixed payments, which aids budgeting. However, you assume residual-value risk and maintenance responsibilities, and the asset counts as a liability, potentially affecting borrowing capacity.

Finance lease Lease payments often include maintenance and insurance, reducing administrative burden. The structure can be more flexible for rapid technology upgrades, and some leases offer residual-value guarantees that mitigate downside risk. On the downside, you never own the asset outright unless you exercise the purchase option, and the front-loaded expense profile may impact early-term profitability.

Accounting and tax implications

Both hire purchase and finance leases are treated as assets you own — so they show up on your accounts as something you’ve bought, along with what you still owe.

With hire purchase, you spread the cost over time and can claim tax relief through capital allowances (usually 18% or 6%, depending on what you’ve bought) and on the interest you pay.

With a finance lease, your monthly payments are usually tax-deductible as business expenses. It’s simpler for accounting, but you won’t get the extra tax relief from depreciation.

The right choice depends on how much profit you expect to make, what your tax rate is, and how you want your finances to appear to lenders or investors.

For detailed guidance on lease accounting, see the IFRS 16 summary on the IASB website.

Case studies

Acme Manufacturing faced an urgent need for high-precision CNC machinery but limited cash reserves. They chose hire purchase with a 10% deposit on a £500,000 machine over five years. Their year-one accounts reflected £100,000 in depreciation allowances and £25,000 in interest deductions – reducing taxable profit by £125,000. Ownership transferred on final payment, and the residual market value of £30,000 provided the option to get rid of the machinery.

Beta Logistics required a temperature-controlled vehicle fleet but needed to preserve borrowing headroom. They opted for a three-year finance lease covering 90% of the fleet’s fair value. Monthly payments included maintenance and tyre replacement. At term end, Beta exercised its £10,000 purchase option for each vehicle. This approach maintained operational agility and kept the fleet up to date without a large capital outlay.

Implementation process and best practices

1. Define requirements: specify asset type, usage patterns, and desired term

2. Obtain quotes: solicit competitive proposals from multiple finance providers

3. Compare total cost: model instalment vs lease-payment cash flows, including maintenance and residual guarantees

4. Review legal terms: ensure clarity on early-termination fees, maintenance obligations and purchase options

5. Accounting review: confirm IFRS 16 or UK GAAP compliance with your finance team

6. Execute and monitor: finalise the agreement, set up payment schedules, and track asset performance

Regularly revisit your funding portfolio to optimise terms as interest rates and business needs evolve. Refinancing mid-term can improve cash flow outcomes or adjust asset lifecycles without restarting procurement.

Frequently asked questions

Can I switch from hire purchase to a finance lease? Yes – outstanding hire purchase liabilities can often be refinanced into a finance lease, subject to provider approval and any break costs.

Which option offers better tax benefits? Hire purchase typically yields larger deductions through capital allowances and interest, while finance leases simplify expensing. Consult your tax advisor to model both.

Are maintenance and insurance included? Hire purchase usually excludes maintenance, but you can negotiate separate service packages. Finance leases often offer fully maintained options for an all-in-one payment.

What happens if I terminate early? Both structures may impose early-termination fees. Finance leases sometimes allow residual-value risk to be shared – hire purchase requires settlement of the outstanding liability.

Conclusion and next steps

Both hire purchase and finance lease remain cornerstone solutions for UK businesses funding vehicles, machinery, and equipment. With asset finance new business at record levels, competition among providers is intense. By carefully evaluating ownership goals, balance-sheet impact, and tax position, you can select the structure that optimises cash flow, flexibility, and financial performance.

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

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