Capital allowances can be confusing to get your head around, but well worth getting to grips with – especially if you can drastically reduce your tax bill.

This article will be focusing on capital allowances for cars. So, if you buy or use cars in your business, we’ll explain what vehicles qualify for capital allowance and what this means for your tax bill.

What are capital allowances?

Capital allowances are a type of tax relief available for businesses which invest in long-term assets. Long term assets, sometimes known as ‘fixed assets’, are assets you expect to keep within your business longer than 12 months. Just like a car, for example.

When you claim capital allowances you’re deducting part, or all, of an asset’s value from your profits. This means you’ll pay less tax, as your overall profits have decreased.

The reason why it gets complicated is because there are different types of capital allowances, with different eligibility criteria.

In some cases you can write off the entire cost of an asset in one year, which can drastically reduce your tax bill. Whereas other assets known for their wear and tear depreciate over time, so in these instances you’ll offset a percentage of the asset’s value against your tax bill every year you continue to own it, giving tax relief over a long period of time.
 

What types of capital allowances can I claim for my business car?

Thankfully, it doesn’t get too complicated when it comes to the types of capital allowances you can claim for your car.

It’s pretty much a choice between either:

• Writing down allowances
• 100% first-year allowances

Writing down allowances

‘Writing down allowances’ is a common type of capital allowance which you can use to deduct a percentage of your car’s value from your profits each year. Most cars usually fall within the main rate pool, but this largely comes down to your car’s CO2 emissions. So, if you haven’t purchased a business car yet, this could be an important factor when deciding what to choose.

How do I work out my writing down allowances?

There are 3 different rates and pools depending on your car’s CO2 emissions:

• 100% first year allowance (FYA)
• Main rate allowance
• Special rate allowance

For writing down allowances, you’ll fall in either the main rate pool or the special rate pool – unless the asset qualifies for the 100% first-year allowance. The table below shows the tax relief you can claim for your car if it was purchased after April 2021.
 

 
Second hand electric cars, as well as new and second-hand cars with CO2 emissions that are 50g/km or less, are also subject to main rate allowances. Whereas new or second-hand cars over 50g/km can claim special rates allowances.

100% first-year allowance

You’re entitled to the 100% first year’s allowance if you:

• Own a new unused electric car
• Have a car with zero CO2 emissions

This means you’ll be able to deduct the full cost of your business car from your profits before tax.

How do I work out my 100% first-year capital allowance?

This is, thankfully, an easy one.

What if I use my car for both business and personal use?

This is where it can get a little complicated – but thankfully you can still claim some of the costs back if you’re self employed! It all boils down to your annual business miles, and overall miles that year.

It can get tricky, especially if you don’t know the exact ratio. Always speak to your accountant if you get stuck.

Does my vehicle type matter?

For capital allowances – absolutely. The table shows what the type of car you drive means for claiming capital allowances.
 

Can I claim capital allowances for my business car as an employee?

Unfortunately, capital allowances do not apply to employees, even if you use your car solely for business purposes. Any company benefits should be discussed with your employer.

 
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