Capital allowances on cars and associated deductible costs

Feb 27, 2024 | Business advice, Self-employed

Cars are an invaluable asset many businesses simply cannot do without. But how do capital allowances work for new and old cars?

In this blog post, we delve into how you can optimise tax relief on vehicle purchases and associated costs by capitalising on every allowable deduction. Keep reading to find out how to keep your business finances in the fast lane.

What are capital allowances?

While capital allowances and business expenses are somewhat similar, it’s important to understand the distinction between them. Let’s make sure we’re all on the same page.

As a business owner, you can deduct the cost of allowable business expenses from your pre-tax profit. This leaves you with a lower taxable profit, resulting in a smaller tax bill.

Capital allowances are essentially the same thing but apply to longer-life assets. You can claim these allowances on cars you buy for business purposes, deducting part of their value from your taxable profits.

Various schemes also apply to different types of cars and when you purchase them. However, these schemes can only be claimed by limited companies.

The scheme you need to use will depend on the vehicle you’re claiming for. For cars bought from April 2021, the allowances are as follows:

Car description What you can claim
New and unused. CO2 emissions are 0g/km or the car is electric 100% first year allowances
Second-hand electric car Main rate allowances
New or second-hand. CO2 emissions are 50g/km or less Main rate allowances
New or second-hand. CO2 emissions are over 40g/km Special rate allowances


Now let’s go over these allowances one by one.

100% first year allowances

For cars that qualify for 100% first year allowances, you can deduct the full cost from your profits before tax. This is the most generous capital allowance scheme because the Government wants to encourage businesses to opt for the assets included in it, including electric cars and cars with zero CO2 emissions.

To claim, make sure to add your purchases to your tax return. If you do not claim all the 100% first year allowances you’re entitled to, you can claim the part of the cost you have not claimed using writing down allowances.

Writing down allowances: main and special rates

Businesses can use writing down allowances to deduct a percentage of the value of certain items from their taxable profits.

Before you can claim these allowances, you need to group items into one of three pools depending on the rate they qualify for. The percentages associated with them are:

  • main rate: 18%
  • special rate: 6%
  • single asset rate: either 6% or 18% depending on the asset

As a reminder, the main rate applies to second-hand electric and new low-emission cars, while the special rate applies to new or second-hand polluting cars. It’s therefore in your best interest to understand which category your vehicle falls under.

Sole traders and partnerships

Capital allowances are only available to limited companies, so where does that put sole traders and partnerships?

If you are self-employed, you can claim simplified mileage expenses on business vehicles instead. However, you cannot claim these if you’ve already claimed for the vehicles in another way.

Simplified mileage expenses use a flat rate for mileage instead of the actual costs of buying and running your vehicle. For cars in their first 10,000 miles, the flat is 45p; for cars outside of 10,000 miles, the rate is 25p.

Access focused business tax support

Navigating capital allowances for company cars can be complicated, so why take on the burden alone? Our bespoke business tax services are here to keep you compliant while maximising your tax savings.

Whether you need help working out which capital allowances you can claim for or you need advice on optimising your tax position, get in touch with FMA today.

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