The rules around capital allowances can be confusing to get your head around, but well worth getting to grips with if you’re trying to reduce your tax bill.

In this article we’ll focus on the different types of capital allowances you might be eligible for if you buy or use cars in your business. We’ll explain what vehicles qualify for capital allowances, and what this means for your tax bill. We talk about more general car and vehicle expenses in a separate article.

What are capital allowances?

Capital allowances are a type of tax relief available for businesses which invest in long-term assets. Long term assets, sometimes known as ‘fixed assets’, are those you expect to keep within your business for longer than 12 months. Just like a car, for example.

When you claim capital allowances you’re deducting part, or all, of an asset’s value from your profits. This means you’ll pay less tax, as your overall profits have decreased. The reason why it gets complicated is because there are different types of capital allowances, with different eligibility criteria.

In some cases you can write off the entire cost of an asset in one year, which can drastically reduce your tax bill. Whereas other assets known for their wear and tear depreciate in value over time, so in these instances you’ll offset a percentage of the asset’s value against your tax bill every year you continue to own it, giving you tax relief over a longer period of time.

What types of capital allowances can I claim for my business car?

Thankfully, it doesn’t get too complicated when it comes to the types of capital allowances you can claim for your car:

• Writing down allowances at either the main rate or the special rate, depending on your car’s emissions
• 100% first-year allowances for zero emissions or electric cars

Writing down allowances enable you to deduct a percentage of the car’s value from your profits each year, before you pay tax. Most cars usually fall within the main rate pool, but this largely comes down to your car’s CO2 emissions. This could be an important factor when deciding what to choose if you haven’t purchased your business car yet.

Vehicle emissions are shown in grams of CO2 given off per kilometer travelled, or g/km. You can check your car’s emissions online.

Capital allowances and vehicle emissions

Our table below shows the different types of capital allowance available, and at what rate, based on your car.
 

 
Second hand electric cars, as well as new and second-hand cars with CO2 emissions that are 50g/km or less, are also subject to main rate allowances. New or second hand cars with emissions over 50g/km can claim special rates allowances.

100% first-year allowances for electric and zero-emission vehicles

You’re entitled to the 100% first year’s allowance (so you’ll deduct the full cost of the car from your profits before tax) if the vehicle is a new unused electric car or a car with zero CO2 emissions.

Let’s say you buy a new and unused electric car for £20,000. You can claim 100% of the £20,000 upfront, which means you’ll deduct the full amount from your profits before tax in the year you buy it. Which can create a huge dent in your tax bill.

What if I use my car for both business and personal use?

This is where it can get a little complicated – but thankfully you can still claim some of the costs back! It all boils down to your annual business miles, and overall miles that year.

• Let’s take the brand new and unused £20,000 electric car as an example
• You can claim the 100% first-year allowance, but you only use the car for business purposes approximately 60% of the time
• Instead of claiming the full £20,000 against your taxable profit, you’ll claim £12,000 (£20,000 x 100% x 60%)

It can get tricky, especially if you don’t know the exact ratio of business to personal. Always speak to your accountant if you get stuck!

Can I claim capital allowances for my business car as an employee?

Unfortunately, capital allowances do not apply to employees, even if you use your car solely for business purposes. Any company benefits should be discussed with your employer.

 
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