Why are UK vehicle leasing costs increasing in 2026?

What is causing the increase in vehicle leasing costs?

Vehicle leasing costs are rising primarily due to downward pressure on Residual Values (RVs) for electric vehicles. Residual Value is the estimated worth of a vehicle at the end of a lease term, and it is the most significant factor in determining monthly rental prices. When the projected resale value of a car decreases, the leasing company must charge more during the contract period to cover the higher depreciation cost.

Factors that can lead to lower prices

The British Vehicle Rental and Leasing Association (BVRLA) recently reported that a significant majority of industry experts expect this pressure to continue through 2026. This market shift is specifically affecting the battery electric vehicle (BEV) sector more than traditional internal combustion engine (ICE) vehicles. As supply in the used EV market increases, the resale prices have softened, leading to adjustments in new lease quotations to maintain financial stability for providers.

Understanding Residual Value (RV) in the Leasing Market

Residual Value is defined as the predicted market value of a vehicle at the point a lease agreement ends. For a three year lease, the RV is what the leasing company expects to sell the car for after 36 months of use. In a standard Personal Contract Hire (PCH) or Business Contract Hire (BCH) agreement, the customer essentially pays for the difference between the initial purchase price and the Residual Value, plus interest and fees.

• High Residual Value: Results in lower monthly payments because the car retains more worth.
• Low Residual Value: Results in higher monthly payments because the car loses more value during the term.
• Market Volatility: Rapid changes in used car demand can cause leasing companies to set conservative RVs, which increases consumer costs.

According to data from Fleet News, the industry is currently grappling with a disconnect between new EV prices and used EV demand. While the government's Zero Emission Vehicle (ZEV) mandate requires manufacturers to sell an increasing percentage of electric cars, the secondary market has not yet scaled at the same pace. This imbalance is the primary driver of the 'RV pressure' mentioned in recent industry outlooks.

The Impact of the ZEV Mandate and Policy

The Zero Emission Vehicle (ZEV) mandate is a UK regulation that requires vehicle manufacturers to ensure a specific percentage of their sales are zero emission. For 2024, the target was set at 22%, rising annually until it reaches 100% in 2035. This policy forces a high volume of new EVs into the market, which can sometimes outstrip organic demand and put further downward pressure on both new and used prices.

10 best electric vehicles to lease

The sector is seeing a clear divide between the performance of used electric vehicles and used petrol or diesel cars, which is directly impacting how we price new lease contracts for our clients.

Despite the pressure on lease rates, business users continue to find electric vehicles attractive due to Benefit in Kind (BIK) tax incentives. Current UK tax policy keeps BIK rates for zero emission vehicles at 2% until April 2025. After this date, the rate will increase by 1% each year, reaching 5% by the 2027/2028 tax year. This remains significantly lower than the tax brackets for traditional combustion engines, which can exceed 30%.

Comparative Leasing Costs: EV vs ICE

While the monthly rental for an EV might be higher due to RV depreciation, the total cost of ownership (TCO) often remains competitive. This calculation includes fuel savings, reduced maintenance requirements, and the significant tax advantages for corporate drivers. At Egon Car Leasing, we advise customers to look beyond the initial monthly figure and consider the net take-home pay impact for business users.

Seasonal price drops

Frequently Asked Questions

Current Market Statistics for 2024-2026

• Total UK new car registrations rose by 3.3% in October 2024 according to SMMT data.
• Plug-in hybrids (PHEVs) saw a significant growth of 26.7% in recent market share reports.
• Public charging points in the UK exceeded 70,000 in late 2024, improving the utility of leased EVs.
• The BVRLA reports that 77% of leasing companies see petrol and diesel cars as a 'safe bet' for value retention currently.

As we move into 2026, the leasing landscape will continue to evolve as the government and industry respond to these economic pressures. Some providers may introduce more flexible mileage terms or longer contract lengths to help consumers manage the monthly cost increase. Drivers should remain informed about policy changes, such as the upcoming VED (Road Tax) changes for electric vehicles starting in April 2025, which will add a modest additional cost to EV ownership.