The same dental chair can give you a completely different tax outcome, and the only thing that changed is how you paid for it. Buy it with cash and you claim capital allowances on the full price this year. Take it on hire purchase and you do much the same, while spreading the payments. Lease it and you claim no allowances at all; you deduct the rentals instead. The finance decision, in other words, is also a tax decision, and treating it purely as a monthly-cost comparison misses half the picture.
This guide sets the four routes side by side and shows exactly where each one lands: in capital allowances (you are treated as the owner) or in deductible rentals (you are treated as renting). It assumes you already know what the AIA and capital allowances are; for the qualifying-equipment basics and how much you can claim, see the dental equipment capital allowances guide. This page owns the finance-method comparison that guide only touches in passing.
The finance method is also a tax decision
Every route below resolves to one fork: do you get capital allowances, or do you get deductible rentals? That fork is set by who is treated as owning the asset for tax. Where you are the owner (outright purchase, hire purchase), you claim allowances on the cost and can front-load the relief through the AIA. Where you are renting (finance lease, operating lease), you do not own the asset for tax, so you claim no allowances and instead deduct what you pay. Both routes ultimately give relief; they differ in when. This is house position §7's lease-versus-buy treatment, and it is additive to the qualifying-equipment rules, not a replacement for them.
Route 1: outright purchase, capital allowances on the full cost
You pay cash, you own the asset, and you claim the AIA (or full expensing, for a company) on the full price in the year you bring it into use. This is the simplest route and the most front-loaded: up to £1m of qualifying plant is relieved at 100% in year one. The cost is cash, because you fund the whole price now rather than spreading it. For a profitable practice with the cash available and an intention to keep the kit, outright purchase gives the cleanest, fastest relief.
Route 2: hire purchase, allowances on the cash price as if owned
Hire purchase is the route that gives you the best of both. Under HP you are treated as owning the asset for capital allowances from the moment you bring it into use, so you claim the AIA or writing-down allowances on the cash price (the capital element of the deal), even though you are paying in instalments. This is set by CAA 2001 section 67.
The interest or finance charge inside the instalments is dealt with separately, as a revenue deduction spread over the term, in line with the accounts. So an HP deal delivers immediate capital allowances on the full cash price and an ongoing interest deduction, while letting you spread the actual cash outlay. For many practices this is the sweet spot between the front-loaded relief of a purchase and the cash-flow comfort of paying over time.
The mechanism is worth pausing on, because it is genuinely favourable and often misunderstood. Capital allowances are given on the basis of expenditure "incurred", and for capital allowances purposes hire purchase is treated as though you had bought the asset outright, with the capital element of the price treated as incurred when the asset is brought into use. The instalment schedule is, in effect, ignored for the allowance: you do not wait until you have paid the last instalment to claim, and you do not claim a slice of the AIA each time you make a payment. You claim on the whole cash price up front. The finance company is simply lending you the money to buy an asset that, for tax, is yours from day one of use. This is why HP is the route that lets a cash-conscious practice still capture full, immediate AIA relief, which a finance lease can never do.
The interest is the price of that arrangement, and it is relieved like any other business interest: as a revenue expense over the life of the agreement, following the accounts. So the two elements of an HP payment are split for tax. The capital element drives the capital allowance (claimed in full, up front, via the AIA). The interest element drives an ongoing revenue deduction (claimed over the term). You are not double-counting; you are recognising that an HP payment is part repayment of a loan to buy an asset and part the cost of that loan.
Route 3: finance lease, no capital allowances, rentals deductible
Under a finance lease the lessor (the finance company) owns the asset for tax and claims the allowances. The practice does not get capital allowances. Instead, the practice deducts the rentals as a revenue expense, broadly following the accounting depreciation and finance charge across the lease term. A finance lease transfers substantially all the risks and rewards of ownership to you in substance, and usually runs for most of the asset's life, but for tax the relief is spread through the profit and loss account rather than front-loaded. You cannot claim allowances on top of the rental deductions.
The point that trips practices up is that a finance lease can feel like a purchase. You choose the asset, you use it for most of its life, you carry the risk if it breaks, and on some agreements you can buy it for a token sum at the end. Economically it is close to ownership. But for tax, ownership of the asset sits with the lessor, who claims the allowances, and you are left with rental deductions. So the substance-over-form instinct that serves you well elsewhere actually points the wrong way here: the agreement may look like buying, but the tax treatment is leasing. The practical consequence is that you forgo the AIA. On a £30,000 chair, that means giving up a potential £30,000 immediate deduction in exchange for spreading the deductions across the term. Over the asset's life the total relief is broadly similar, but you have lost the front-loading that the AIA offers, and that is a real cost in present-value terms.
Route 4: operating lease, pure rental, fully deductible
An operating lease is a true rental: it runs for less than the asset's useful life, and you hand the asset back at the end. There is no ownership and no capital allowances; the rental payments are fully deductible as a trading expense as incurred. This is the route often used for fast-depreciating equipment, imaging and IT that you want to refresh on a cycle rather than own to the end of its life. You deduct each payment, avoid a large cash outflow, and never carry the disposal risk of obsolete kit.
The comparison, side by side
| Feature | Outright purchase | Hire purchase | Finance lease | Operating lease |
|---|---|---|---|---|
| Who owns it for tax | You | You (treated as owner) | The lessor | The lessor |
| Capital allowances? | Yes, on full cost | Yes, on the cash price | No | No |
| What you deduct | AIA / WDAs | AIA / WDAs, plus HP interest | Rentals (per accounts) | Rentals as incurred |
| VAT treatment | Reclaim up front | Reclaim up front | VAT on each rental | VAT on each rental |
| On your balance sheet? | Yes | Yes | Yes | Depends on framework |
This grid is the centrepiece. Read across any row and you can see why the finance choice is a tax choice: the ownership question in the first row drives everything below it. For more on the broader finance and cash-flow side of these decisions, the equipment finance overview is the companion to this structured tax comparison.
VAT, briefly: HP reclaims up front, leasing reclaims per payment
On hire purchase a VAT-registered practice can generally reclaim the VAT on the asset up front. On a finance or operating lease, the VAT is charged on each rental and reclaimed per payment, spreading the recovery across the term. For a partly-exempt dental practice this interacts with partial exemption: most dental supplies are exempt, so VAT recovery on equipment is often restricted anyway, which can blunt the up-front-reclaim advantage of HP. Keep the VAT point in view, but for most practices the income-tax and corporation-tax timing matters more than the VAT timing.
Total relief is often similar; the timing and cash flow differ
It is worth being honest about this, because the marketing around finance often is not. Over the asset's whole life, the total tax relief under purchase or HP (capital allowances) and under leasing (deductible rentals) tends to converge. You are relieving broadly the same cost either way. The real differences are the timing of relief (front-loaded under the AIA versus spread under leasing) and the cash flow (a large outlay now versus smaller payments over time). The honest takeaway is a trade-off, not a "buying always wins" line.
This matters because the finance industry tends to present leasing as "tax-efficient" in a way that implies it gives more relief than buying. It does not. A finance lease that lets you deduct £30,000 of rentals over three years gives you the same headline £30,000 of relief that an outright purchase or HP gives you in one year through the AIA. What differs is when you get it. The AIA pulls the whole deduction into year one; the lease drips it out over the term. In present-value terms, relief sooner is worth more than relief later, so on the tax timing alone the purchase or HP route is marginally ahead for a profitable practice. But that advantage is small, and it can be outweighed by the cash-flow benefit of not paying for the asset all at once. The right answer genuinely depends on the practice's cash position and profit profile, which is why this is a modelling exercise, not a slogan.
There is one situation where the timing difference can swing the other way. If the practice has little or no taxable profit this year, a 100% AIA deduction is worth nothing extra, because there is no profit to relieve, and the unused relief does not produce a refund. In that case spreading the relief through lease rentals, which fall in future years when profits may be higher, can actually capture more value. So even the "front-loading is better" rule of thumb has to be tested against the practice's expected profits, not assumed.
When each route earns its place for a dental practice
Outright purchase or hire purchase suits a practice that wants the front-loaded AIA relief and intends to keep the equipment, a dental chair, a compressor, a unit you will run for a decade. An operating lease suits fast-obsolescing imaging or IT you want to refresh, where ownership to the end of life is a liability rather than a benefit. A finance lease is rarely the tax-optimal choice for a profitable owner-occupier, but it is sometimes the only finance available, and the only finance available beats no equipment. Frame the choice as a decision matched to the asset and the practice, not a verdict.
It helps to match the method to the nature of the asset. Long-life, durable equipment that holds its usefulness, a chair, a compressor, a sterilisation suite, suits ownership, because you will run it long enough to be glad you took the front-loaded relief and you will not be left wanting to refresh it every few years. Fast-moving technology, an intraoral scanner, digital imaging, the IT estate, suits an operating lease, because the value is in being able to hand it back and upgrade when the next generation arrives, rather than owning an obsolete asset you then have to dispose of, possibly triggering a balancing charge. Equipment somewhere in between, where you want it but cannot or do not wish to fund it outright, suits hire purchase, which captures the AIA while spreading the payments.
The financing decision should also sit alongside the wider question of how the practice funds itself. A practice that is cash-rich and highly profitable may simply buy, taking the cleanest relief. A practice managing tight cash, or preserving its borrowing capacity for a bigger move such as a premises purchase or an acquisition, may prefer HP or leasing to keep cash free. None of these is wrong; they are different answers to different circumstances, and the tax treatment is one input into the decision rather than the whole of it.
The interaction with the £1m AIA and year-end timing
Purchase and HP both feed the AIA, so the finance choice and the year-end timing decision are linked. An HP deal "incurred" and brought into use before year-end can pull the whole cash price into this year's AIA, even though you have only paid the deposit. A lease does not touch the AIA at all. So if you are managing the £1m allowance across a busy year, or trying to land a large purchase in a high-profit period, the finance mix and the timing decision have to be planned together. The same principle drives how a fit-out's pooled plant consumes the AIA.
Cars are different: a short warning
None of this applies cleanly to cars. Cars are excluded from the AIA, leased-car deductions are restricted, and the writing-down rate depends on emissions. So do not read the rules above across to a practice car; the car rules are their own subject, and you should treat them separately and take specific advice.
The differences are not trivial. Because a car cannot take the AIA, a purchased or HP car goes into a capital-allowances pool and writes down at either the main or the special rate depending on its emissions, so there is no front-loaded 100% relief to be had. On a leased car, the deductible rentals can be restricted where the car's emissions exceed a threshold, removing a slice of the relief entirely. And for any car used privately as well as for business, the deduction has to be apportioned for the private element. The upshot is that the clean "purchase and HP give front-loaded allowances, leases give full rental deductions" framing of this article simply does not hold for cars, which is exactly why they are carved out and dealt with under their own rules.
Worked examples
Example A: the same £30,000 chair, four finance routes
A £30,000 dental chair, acquired in the 2026/27 period.
- Outright purchase: claim £30,000 AIA in year one, 100% relief now.
- Hire purchase (deposit plus 36 instalments): claim £30,000 AIA on the cash price when the chair is brought into use, plus deduct the finance interest over the term.
- Finance lease: no allowances; deduct the rentals, roughly £10,000 a year over three years, as a revenue expense.
- Operating lease: no allowances; deduct each rental as paid.
Purchase and HP front-load the relief into year one; the two leases spread it across the term. The total relief is broadly similar over the life; the timing is not. (Tagged 2026/27, house position §7.)
Example B: the cash-flow versus timing trade-off
A higher-rate sole-trader associate weighs outright purchase against an operating lease on the same £30,000 chair. Outright purchase gives a full £30,000 deduction now, saving roughly £12,600 of tax at a combined marginal rate of about 42%, but it costs £30,000 of cash out the door. The operating lease gives smaller deductions each year and no large cash outflow. Set the year-one tax saving against the year-one cash position and the trade-off is clear: the purchase wins on speed of relief, the lease wins on cash preservation. There is no single right answer; it depends on the associate's cash and profit profile. (Tagged 2026/27, house position §7.)
Example C: hire purchase brings the whole cash price into this year's AIA
A practice with a 31 March year-end signs an HP agreement and brings a £45,000 OPG machine into use in March 2027. The full £45,000 cash price enters the 2026/27 AIA, even though only the deposit has been paid, because HP is treated as a purchase for capital allowances under section 67. Contrast a finance lease on the same machine: nothing enters the AIA, and the practice simply deducts the rentals over the term. The HP route therefore pulls the whole relief into the year the asset is brought into use, which is exactly the lever the year-end timing decision turns on. (Tagged 2026/27, house position §7.)
Common errors
- Assuming a finance lease gives capital allowances. It does not; the lessor claims them, you deduct rentals.
- Double-counting by claiming allowances and deducting rentals on the same asset.
- Ignoring the up-front VAT reclaim advantage of HP (subject to partial exemption).
- Choosing finance purely on monthly cost without modelling the tax timing.
- Treating an operating-lease asset as if you owned it, when for tax you are renting.
The discipline here is simple: decide what you want the relief to do, front-load it or spread it, and match the finance method to that, the asset's life and your cash position. We once modelled exactly this for an associate choosing between an operating lease and hire purchase on a new scanner, setting the year-one relief against the three-year cash position for both, so the decision was a numbers call rather than a salesperson's pitch. The finance method is a tax lever; pull it deliberately.