Capital Allowance on Cars: A Complete Guide for Businesses

Capital allowances allow businesses to deduct the cost of assets, including company cars, from their taxable profit. This reduces tax liabilities and provides tax relief. However, not all cars qualify for the same level of deduction. The amount a business can claim depends on factors such as the car’s CO2 emissions, whether the car is new or second-hand, and how much the car is used privately.

In this guide, we explain how capital allowances on cars work, the current rates, and how businesses can claim the full relief they are entitled to. Whether you own a fleet of vehicles or a single company car, understanding these allowances can lead to meaningful savings.

What qualifies as a car for capital allowances?

To qualify for capital allowances, a car must be used for business purposes. Cars do not qualify for the annual investment allowance, so businesses must claim them under other capital allowance categories.

A car is generally defined as a motor vehicle suitable for private use. Vehicles such as motorcycles, lorries and vans are treated differently for tax purposes. If a vehicle is classified as a van rather than a car, it may qualify for the annual investment allowance, allowing a business to deduct the full cost in the year of purchase.

Businesses should also ensure that the car is bought outright or on hire purchase. Under a hire purchase agreement, the allowance is available once the car is brought into use in the business, even though instalments continue. Leased cars follow different tax rules, which we cover below.

Reliefs that cars cannot use

Cars are excluded from several of the more generous capital allowance reliefs. A car cannot qualify for:

• the annual investment allowance
• full expensing
• the 40% first-year allowance for main rate plant and machinery, introduced on 1 January 2026

This last point causes confusion. Businesses that have heard about the new 40% first-year allowance sometimes assume it covers company cars. It does not. Cars and second-hand assets are both excluded from that relief.

What types of capital allowance can a business claim on a car?

Since cars do not qualify for the annual investment allowance, businesses can claim tax relief through first-year allowances or writing down allowances.

1. First-year allowance (FYA)

Businesses can claim a 100% first-year allowance on new and unused cars with zero CO2 emissions, such as a fully electric car. The full cost of the car can be deducted from taxable profits in the year of purchase.

Two conditions matter here. The car must be brand new and unused, and the expenditure must be incurred before the relief expires. Following the Autumn Budget 2025, the 100% first-year allowance for zero-emission cars runs until 31 March 2027 for corporation tax purposes and 5 April 2027 for income tax purposes.

A second-hand electric car does not qualify. It goes into the main pool at 14% instead. This is one of the most common mistakes we see on client tax returns.

This incentive is designed to encourage businesses to invest in cleaner vehicles and reduce their carbon footprint.

2. Writing down allowances (WDA)

If a car does not qualify for the 100% first-year allowance, a business can still claim writing down allowances. These are applied at different rates depending on the car’s CO2 emissions:

• Main rate (14%): cars with CO2 emissions of 1g/km to 50g/km, and second-hand zero-emission cars
• Special rate (6%): cars with CO2 emissions above 50g/km

Writing down allowances let a business deduct a percentage of the car’s remaining value each year rather than the full cost immediately. This suits businesses buying several vehicles, because relief continues across future accounting periods.

Capital allowance rates on cars at a glance

What changed in April 2026?

The main rate writing down allowance was 18% for more than a decade. It reduced to 14% for chargeable periods beginning on or after 1 April 2026 for businesses within corporation tax, and on or after 6 April 2026 for businesses within income tax. The change was made by Finance Act 2026, which substituted 14% for 18% in section 56 of the Capital Allowances Act 2001.

No relief is lost. The same total cost is still deducted, but the deduction is spread over a longer period. Businesses with large brought-forward main pool balances feel this most.

The hybrid rate for straddling accounting periods

If your chargeable period began before the change and ends on or after it, you cannot simply apply 18% or 14% to the whole period. A hybrid rate applies instead.

The statutory formula apportions the period by days. The rate is (18 x days before the change divided by days in the period) plus (14 x days on or after the change divided by days in the period). The result is rounded up to two decimal places.

For example, a company with a year ending 30 June 2026 has 274 days before 1 April 2026 and 91 days on or after it. The hybrid rate for that period is 17.01%.

Applying the wrong rate to a straddling period results in either an underclaim or an overclaim, so this is worth checking carefully.

How is the allowance rate determined?

The rate of allowance depends on:

• CO2 emissions: lower emissions qualify for better tax relief
• New or second-hand: only new and unused cars qualify for the 100% first-year allowance
• Purchase date: rates and thresholds change, so the date the expenditure was incurred matters
• Private use: where a car is used privately, the claim is restricted

Businesses should also weigh the long-term costs of ownership, including fuel efficiency, maintenance and resale value, when choosing a car.

Example calculations

Example 1: electric car with zero CO2 emissions

A business buys a new and unused electric car for £40,000. Because the car has zero CO2 emissions and is unused, it qualifies for the 100% first-year allowance. The company deducts the full £40,000 from its taxable profit in the first year, which reduces its corporation tax liability in that period.

Example 2: low-emission car with CO2 emissions of 45g/km

A business buys a hybrid car costing £30,000. Emissions are below 50g/km, so the car goes into the main pool.

The company claims a 14% writing down allowance in the first year:

14% of £30,000 = £4,200

The remaining balance of £25,800 is written down at 14% in future years. This gradually reduces taxable profits over time. If the accounting period straddles April 2026, the hybrid rate applies instead.

Example 3: higher-emission car with CO2 emissions of 100g/km

A business buys a petrol car for £25,000. Emissions exceed 50g/km, so the car falls into the special rate pool.

The business claims a 6% writing down allowance:

6% of £25,000 = £1,500

The remaining balance is claimed in future years. The relief is smaller but continues.

How do sole traders and partnerships claim capital allowances on cars?

Capital allowances on cars are not only a company matter. Sole traders and partnerships claim them too, with two important differences.

Private use adjustment

If you use the car for both business and private journeys, you can only claim the business proportion of the allowance. The car is held in a single asset pool so that the adjustment can be made each year.

For example, a sole trader buys a car emitting 40g/km for £20,000 and uses it 60% for business. The writing down allowance is 14% of £20,000, which is £2,800. The amount actually claimed is 60% of £2,800, which is £1,680.

The rate that applies to a single asset pool is the rate the car would have attracted in an ordinary pool, so emissions still determine whether the rate is 14% or 6%.

Cars and the cash basis

If you are a sole trader or partnership using the cash basis, cars are the one asset on which you can still claim capital allowances. Other equipment is deducted as a normal business expense instead.

Accurate mileage records matter here. Without them, the private use split cannot be supported if HMRC asks.

You cannot claim mileage and capital allowances on the same car

Sole traders and partners can use the simplified expenses mileage rate instead of claiming actual costs. The rates are 45p a mile for the first 10,000 business miles in a tax year and 25p a mile after that.

If you use the mileage rate for a car, you cannot also claim capital allowances on that car. The mileage rate is intended to cover the running costs and the cost of the vehicle together. Once you have used the mileage rate for a particular car, you must continue with it for as long as you use that car in the business.

Which method works out better depends on the price of the car, its emissions and your annual business mileage. A high-value electric car bought new usually favours capital allowances. A low-value older car driven long distances often favours mileage. Work out both before you choose, because the decision is difficult to reverse.

Special considerations

Leased cars

If a business leases a car, it cannot claim capital allowances. Lease payments are deducted as a business expense instead.

There is a restriction to be aware of. For leases entered into on or after 1 April 2021 for companies and 6 April 2021 for unincorporated businesses, 15% of the lease payments are disallowed where the car’s CO2 emissions exceed 50g/km. Only 85% of the cost is deductible. Cars at or below 50g/km escape the restriction entirely.

The threshold depends on when the lease started, not on the current tax year. Leases entered into between April 2018 and April 2021 use a 110g/km threshold, and earlier leases use higher thresholds again. Short-term hire of 45 consecutive days or less is outside the restriction.

This makes the choice between buying and leasing worth modelling properly rather than assuming. A purchased zero-emission car can deliver a full deduction in year one, while a leased higher-emission car delivers a reduced deduction spread across the lease term.

Selling or disposing of a business car

When a business sells a car, the sale proceeds are deducted from the relevant pool.

If the proceeds exceed the remaining pool balance, the difference is a balancing charge. A balancing charge increases taxable profit, so it is effectively a clawback of relief already given.

If the proceeds are lower than the remaining balance, a balancing allowance may arise, but only where the car sat in a single asset pool. Cars held in the main or special rate pool do not produce a balancing allowance on disposal. The pool balance simply reduces and carries forward, and relief continues at 14% or 6% a year. For pooled assets, a balancing allowance normally arises only when the business ceases to trade.

This matters most for zero-emission cars. If you claimed a 100% first-year allowance, nothing was added to the pool for that car. When you sell it, the sale proceeds are still deducted from the main pool. If the pool balance is smaller than the proceeds, the difference becomes a balancing charge and increases your taxable profit in that period. The timing of a disposal is therefore worth planning.

Electric cars and tax benefits

Electric cars currently offer the strongest capital allowance position available on a car:

• A full deduction in the year of purchase, provided the car is new and unused
• Availability confirmed until 31 March 2027 for corporation tax and 5 April 2027 for income tax
• Lower benefit in kind charges for directors and employees compared with petrol and diesel equivalents
• Lower running costs across the life of the vehicle

Businesses considering an electric car should note the 2027 expiry date. Expenditure incurred after that point does not attract the 100% first-year allowance under current legislation.

Call us today or book an appointment to discuss your capital allowance position.

Dated changes to be aware of

How to get the most from your capital allowance claim

• Choose lower-emission cars. The gap between 100%, 14% and 6% is substantial across the life of a vehicle.
• Buy new and unused if you want the full first-year deduction. A second-hand electric car drops to 14%.
• Check your accounting period end. A period straddling April 2026 needs the hybrid rate.
• Keep accurate records. Invoices, CO2 figures, purchase dates and mileage logs all support the claim.
• Plan disposals. A sale can trigger a balancing charge that offsets relief claimed in earlier years.
• Consult a tax specialist. A tax accountant can confirm the correct pool, rate and adjustment, and ensure the claim complies with HMRC rules.