What Are 'Capital Allowances'?

As tax rules go, the ones for getting a deduction for the cost of buying a business car are amongst the most complex.

Instead of just deducting the purchase price of the vehicle against your profits when you buy it, you typically have to spread the cost of the car over a long, long, time.

The rules for capital allowances on vans are different (click here to see these rules), but here's a summary of the rules for cars.

How Do Capital Allowances Work?

Let's say you buy a new company car for £30,000.

Unless the car has zero (0%) tailpipe emissions (essentially, electric cars) you don't get a £30,000 tax deduction against your profits for the tax year in which you bought the vehicle.

You have to spread the tax deduction across at least your period of ownership of the vehicle (and often longer) through a system called 'Capital Allowances'.

With Capital Allowances, each tax year you get a proportion of the cost of the vehicle as a deduction against profits.

The deduction varies between 6% and 18% of the car's value depending on its CO2 output (though with an exception for electric company cars).

And the rules are written so that the tax deduction you get becomes smaller as each tax year passes.

As a result you can end up waiting for many years to be able to write off a car against your profits, and sometimes you'll still be waiting for tax relief even though you have sold the vehicle and moved on to another.

How Are Electric Cars Different?

Unlike internal combustion engined ('ICE') cars, if you've just bought an electric car for your business you can currently write off the whole cost straight away for tax purposes.

The entire purchase price of the electric car can be set against your profits so, using our example earlier, the cost of a £30,000 car will qualify for tax relief in full.

Taking our example one stage further, let's say you made a £30,000 taxable profit this tax year, but you bought a qualifying electric car costing £30,000.

By off-setting your £30,000 electric car purchase against the £30,000 profit you've no longer got a tax liability.

(You can also choose to defer the tax deduction if you haven't made enough profits to cover the cost of the car.)

Good News For Hybrids Too

Up to April 2021:
If you buy a new hybrid car and it emits less than 50g/km of CO2 then you can write off the cost in the same way as a full EV - there's a 100% deduction available.

From April 2021:
Hybrids typically benefit from the rules for cars with lower CO2 (50GP/Km or less) at 18% capital allowances.

Here's The Detail ...

Cars with CO2 emissions less than 50GP/km

Up to April 2021:
For company cars emitting less than 50GP/km of CO2 (tax year 2020/21), 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.

From April 2021:
The CO2 upper limit for 100% first year capital allowances is reduced from 50GP/km to zero GP/Km, so in effect only electric vehicles qualify for 100% first year capital allowances - hybrids don't qualify - and the capital allowances rate for cars up to 50GP/Km is 18%.

Cars with CO2 emissions 51-110GP/km

Up to April 2021:
The capital allowances rate is 18% per annum for cars emitting 51-110GP/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.

From April 2021:
The capital allowances rate is 18%.

Car Emission More than 110GP/km

Up to April 2021:
For cars emitting more than 110GP/km the capital allowances rate is 6% per annum and such vehicles are not added to the general plant and machinery pool.

Instead these vehicles go into a separate pool to which the 6% rate applies.

For example:
A car is purchased for £30,000
The existing special capital allowances pool for cars is already at £100,000
The value of the pool becomes £130,000
Capital allowances are given at 6% on the total special pool, i.e. £7,800
The special pool value carried forward to the next year is £130,000 - £7,800 = £122,200
Once again, if the vehicle is sold then the sales proceeds are deducted from the value of the special pool.

From April 2021:
The cars go into the special 6% pool.

What Happens When You Sell A Car?

In this simple example we assume just one car is owned by the business. When a car for which you have claimed capital allowances is sold, the sales proceeds are usually deducted from the capital allowances pool.

Example: Capital Allowances for a Car

• Cost of the car: £30,000
• Sales value after 4 years: £12,000
• Capital allowances rate: 18%

Year 1 Calculation

1. Written Down Value (WDV) at the start: £30,000
2. Capital Allowance (18% of £30,000): £30,000 * 18% = £5,400
3. WDV at the end of Year 1: £30,000 - £5,400 = £24,600

Year 2 Calculation

1. WDV at the start: £24,600
2. Capital Allowance (18% of £24,600): £24,600 * 18% = £4,428
3. WDV at the end of Year 2: £24,600 - £4,428 = £20,172

Year 3 Calculation

1. WDV at the start: £20,172
2. Capital Allowance (18% of £20,172): £20,172 * 18% = £3,631
3. WDV at the end of Year 3: £20,172 - £3,631 = £16,541

Year 4 Calculation

1. WDV at the start: £16,541
2. Capital Allowance (18% of £16,541): £16,541 * 18% = £2,978
3. WDV at the end of Year 4: £16,541 - £2,978 = £13,563

Summary of Capital Allowances:

• Year 1: £5,400
• Year 2: £4,428
• Year 3: £3,631
• Year 4: £2,978

Notes:

1. Total Capital Allowances over 4 years: £5,400 + £4,428 + £3,631 + £2,978 = £16,437
2. Remaining value after 4 years: £13,563
3. If the car is sold for £12,000 after 4 years, the difference between the WDV (£13,563) and the sale price (£12,000) will be treated as a balancing allowance.

What about electric cars?

When the car is sold the proceeds are added back to profits, for example:

• Year 1: Full deduction for the purchase price (e.g. £30,000)
• Year of Sale: Sale proceeds added to profits (e.g. £12,000), so overall £18,000 deducted against profits

HMRC Guidance

Here's a link to HM Revenue & Customs' guidance on capital allowances for cars - this also explains the rules for 'used' cars too.

Effects of Capital Allowances

Because cars typically depreciate from new at a rate faster than either of the 18% or 6% capital allowances rates the practical effect of capital allowances is normally to defer busines tax relief on depreciation for company cars except for electric cars.

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

But with electric cars, relief will be given 100% in the tax year the vehicle is purchased (subject to you having sufficient profits).

Please note: The examples in this page relate ONLY to company cars, NOT vans.

For more information on capital allowances for electric vans click on this link.

Self-employed

For the self-employed, where a car bought by the business is used partly for non-business purposes, tax relief is apportioned according to the ratio of annual business miles to total annual miles.

For example:
A qualifying electric car costs £30,000
The car is eligible for capital allowances at the full rate of 100%
The business use of the car is 50%
The capital allowances will be £15,000 (£30,000 @ 100% x 50%)