For your tax rebate, there’s no difference between PCP and HP. Both are forms of car finance that can lead to compensation, and the interest in that compensation is taxed the same way. What matters is how much tax the lender deducted and your own income in the year you were paid.
What hire purchase (HP) is
With hire purchase, you usually pay a deposit and then fixed monthly instalments that cover the full price of the car plus interest. When you make the last payment, you own the car.
Monthly payments tend to be higher than with PCP, because you’re paying off the whole value of the car.
What personal contract purchase (PCP) is
With PCP, you also pay a deposit and monthly instalments. But the instalments don’t cover the full value of the car. A large final payment, often called a balloon payment, is left at the end.
When the agreement ends, you can usually:
- pay the balloon payment and keep the car
- hand the car back
- part-exchange it towards another car on finance
Because the balloon payment is deferred, PCP monthly payments are usually lower than HP payments on the same car.
How the FCA treats them
The FCA’s car finance claims page describes PCP as a type of hire purchase agreement. Its compensation scheme covers car finance agreements taken out between 6 April 2007 and 1 November 2024, for vehicles including cars, motorbikes, vans and campervans.
Leasing isn’t covered. If you had Personal Contract Hire (PCH), you never had the option to own the car, and the FCA says its scheme won’t apply. Our news article on which PCP and HP agreements the FCA scheme covers goes into eligibility in more detail.
Whether an individual agreement is owed compensation depends on how the dealer or broker was paid commission and what you were told. That’s the same for PCP and HP. Our guide to discretionary commission arrangements explains the background.
The scheme has been subject to legal challenge. On 2 July 2026 the FCA said the Upper Tribunal had suspended parts of it, including the requirement for firms to calculate and pay compensation on the original timetable. Check the FCA’s site for the latest position.
Why the tax works the same
Compensation is often made up of a sum to put right your loss, plus interest for the time you were without that money. The interest counts as savings income whatever the agreement type.
The lender usually deducts 20% income tax from that interest before paying you. It deducts the same 20% whether the agreement was PCP or HP, and whatever your own tax position.
Whether you can reclaim some of that tax depends on your income in the tax year you were paid. As a general guide:
- non-taxpayers can usually reclaim all of it
- basic-rate taxpayers can usually reclaim up to £200
- higher-rate taxpayers can reclaim some or all of it on smaller payouts
- additional-rate taxpayers usually can’t reclaim anything
See our guides for non-taxpayers, higher-rate taxpayers and hire purchase for the detail.
If you had both
Plenty of people have had a PCP on one car and HP on another. If more than one payout lands in the same tax year, they go on one claim, and the interest is added together when HMRC works out what you owed. Our guide to multiple payouts explains how that works.
Getting the tax back
Whether your payout was for PCP or HP, the repayment is usually claimed from HMRC on an R40, or through your Self Assessment return if you file one. The key document is the lender’s letter showing the gross interest, the tax deducted and the net interest.
When you use our service, we check whether you’re likely to be owed anything, work out the right tax year, prepare and submit the R40 as your agent and deal with any HMRC queries. Our how it works page explains the process.
Next step
If you’re not sure who provided your finance, start with our guide on how to find your car finance lender. If you have the letter, try our eligibility calculator.