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 corporate tax liabilities and provides significant 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, purchase price, and whether it is new or second-hand.
In this guide, we will discuss how capital allowances on cars work, the different rates available, and how businesses can maximise their tax benefits. Whether you own a fleet of vehicles or just one company car, understanding these allowances can lead to significant savings.
What Qualifies as a Car for Capital Allowances?
To qualify for capital allowances, a car must be used for business purposes. However, cars do not qualify for the annual investment allowance (AIA), meaning businesses must claim them under other capital allowance categories.
A car is generally defined as a motor vehicle suitable for private use. However, 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 AIA, allowing businesses to deduct the full cost in the year of purchase.
Businesses should also ensure that the car is purchased outright or on hire purchase, as leased cars follow different tax rules.
Types of Capital Allowances Available for Cars
Since cars do not qualify for the annual investment allowance, businesses can claim tax relief through:
1. First-Year Allowance (FYA)
- Businesses can claim 100% first-year allowance on new and unused cars with zero CO₂ emissions (such as an electric car).
- This means the full cost of the car can be deducted from taxable profits in the first year.
- Cars must be brand-new to qualify for the 100% first-year allowance.
- This incentive is designed to encourage businesses to invest in environmentally friendly vehicles and reduce their carbon footprint.
2. Writing Down Allowances (WDA)
If a car does not qualify for 100% first-year allowance, businesses can still claim writing down allowances. These are applied at different rates depending on the car’s CO₂ emissions:
- Main Rate (18%): Cars with CO₂ emissions of 50g/km or less go into the main pool.
- Special Rate (6%): Cars with CO₂ emissions over 50g/km fall into the special rate pool.
Writing down allowances allow businesses to deduct a percentage of the car’s cost each year instead of the full cost immediately. This is particularly beneficial for businesses purchasing multiple vehicles, as they can still claim a portion of the cost over several years.
How to Determine the Allowance Rate
The rate of allowance depends on:
- CO₂ emissions: Lower emissions qualify for better tax relief.
- Purchase date: Changes in tax laws may affect eligibility.
- New vs second-hand cars: Only unused cars qualify for 100% first-year allowance.
Businesses should also consider the long-term costs of vehicle ownership, including fuel efficiency, maintenance costs, and resale value when selecting a car.
Example Calculations
Example 1: Electric Car (Zero CO₂ Emissions)
- A business buys an electric car for £40,000.
- Since it has zero CO₂ emissions, it qualifies for the 100% first-year allowance.
- The company can deduct the full cost of £40,000 from its taxable profit in the first year.
- This significantly reduces the company’s corporate tax liability.
Example 2: Low-Emission Car (CO₂ Emissions of 45g/km)
- A business purchases a hybrid car costing £30,000.
- Since its CO₂ emissions are under 50g/km, it goes into the main pool.
- The company can claim 18% writing down allowance in the first year:
- 18% of £30,000 = £5,400.
- The remaining balance is claimed in future years.
- This allows the company to gradually reduce its taxable profits over time.
Example 3: High-Emission Car (CO₂ Emissions of 100g/km)
- A business buys a petrol car for £25,000.
- Since emissions are over 50g/km, it falls into the special rate pool.
- The business can claim 6% writing down allowance:
- 6% of £25,000 = £1,500.
- The remaining balance is claimed in future years.
- This means the company benefits from a smaller but ongoing tax relief.
Special Considerations
Leased Cars
- If a business leases a car, it cannot claim capital allowances.
- Instead, lease payments are deducted as business expenses.
- However, if a leased car has high CO₂ emissions, a portion of the lease payments may be disallowed for tax purposes.
Disposals and Selling Business Cars
- If a business sells a car, it must deduct the sale price from the allowance pool.
- If the sale price exceeds the remaining allowance, it may be taxable.
- Businesses should carefully plan the timing of car disposals to optimise tax savings.
Electric Cars and Tax Benefits
- Enhanced capital allowances encourage businesses to invest in electric cars.
- Full cost deductions in the first year provide significant tax relief.
- Businesses should consider government grants and incentives for electric vehicles.
- Lower running costs and exemption from road tax further enhance savings.
Call us today or book an appoinment to discuss your capital allowance strategy!
Recent and Upcoming Changes
Tax rules on capital allowances for cars are frequently updated. Businesses should check the latest guidelines to ensure they are maximising tax savings. Some recent changes include:
- CO₂ emission thresholds being tightened to encourage greener vehicles.
- Government incentives for electric vehicles being expanded.
- The phasing out of petrol and diesel cars in favour of electric and hybrid models.
- Possible changes to first-year allowances for low-emission vehicles in future budgets.
How to Maximise Your Capital Allowance Claim
- Choose Low-Emission Cars: Cars with lower CO₂ emissions qualify for better allowances.
- Buy New and Unused Cars: Only unused cars qualify for 100% first-year allowance.
- Keep Accurate Records: Ensure invoices, receipts, and usage details are properly maintained.
- Consider Electric Cars: They provide the best tax relief and future-proofing against stricter regulations.
- Consult a Tax Specialist: An tax accountant can help you claim capital allowances correctly and ensure compliance with HMRC rules.
Conclusion
Understanding capital allowances on cars is crucial for businesses looking to reduce corporate tax liabilities. While cars do not qualify for the annual investment allowance, businesses can still claim tax relief through first-year allowances or writing down allowances.
For expert advice on claiming capital allowances and optimising tax savings, contact our professional accountants today!
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