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   Business Tax Relief For Cars Bought Outright



Tax relief for depreciation on company cars is given through a system called Capital Allowances


How Do Capital Allowances Work?

Capital Allowances work by applying a fixed percentage rate of depreciation each year, irrespective of the actual depreciation of a vehicle.

The percentage rate of depreciation allowed as a deduction against business taxes depends on the CO2 emissions of the vehicle.

Car CO2 Emission Less than 50g/km CO2

For cars emitting less than 50g/km of CO2 (tax year 2018/19) the full amount of the purchase price can be claimed as a capital allowance in the year of purchase (known as a 'first year allowance'), subject to adjustment if profits are less than the first year allowance available.

Prior to 1 April 2018 the upper limit for 100% first year allowances was 75g/km.

Car CO2 Emission 51-110g/km CO2

The capital allowances rate is 18% per annum for cars emitting 51-110g/km.

Such cars are treated as part of the general plant and machinery assets of the business and added to the overall capital allowances pool for the business.

For example:

  • A car is purchased for £20,000
  • The existing capital allowances pool is already at £100,000
  • The value of the pool becomes £120,000
  • Capital allowances are given at 18% on the total pool, i.e. £21,600
  • The pool value carried forward to the next year is £120,000 - £21,600 = £98,400

When the car is sold the sale proceeds are deducted from the value of the pool.

If the sales proceeds are less than the purchase price less capital allowances already given then the difference will continue to be written down in the pool.

As a result, capital allowances may continue to be given on the difference between the purchase and sale prices for many years after the vehicle has been sold.

Prior to 1 April 2018 the upper limit for the 18% rate allowance was 130g/km.

Car Emission More than 110g/km

For cars emitting more than 110g/km the capital allowances rate is 8% per annum.

Such vehicles are not added to the general plant and machinery pool.

Instead these vehicles go into a separate pool to which the 8% rate applies.

For example:

  • A car is purchased for £20,000
  • The existing capital allowances pool is already at £100,000
  • The value of the pool becomes £120,000
  • Capital allowances are given at 8% on the total special pool, i.e. £9,600
  • The special pool value carried forward to the next year is £120,000 - £9,600 = £110,400

Once again, if the vehicle is sold then the sales proceeds are deducted from the value of the special pool.

Effects of Capital Allowances

Because company cars typically depreciate at a rate faster than the 18% or 8% capital allowances rate, the practical effect of capital allowances is to defer busines tax relief on depreciation for company cars.

This means that, for cars bought outright, tax relief on the total cost of depreciation may not be given until years after the the vehicle has been sold.

Inter-active Capital Allowances Calculator

To see an inter-active example of a capital allowances calculation just click on this link.

The calculator gives an example of the capital allowances timing for all current new cars using a simple 'non-pooled' basis to demonstrate the extended period of time over which tax relief is given.

(Please note: The examples in this page relate ONLY to company cars.)





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0330 444 0400
(+44 1792 224319 outside UK)

info@drivesmart.co.uk