UK Capital Allowances on Cars: The Complete Guide (2025)

Introduction

Navigating the world of capital allowances for business vehicles can be complex, but understanding these tax reliefs is essential for maximizing your business's tax efficiency. This comprehensive guide breaks down everything business owners and accountants need to know about claiming capital allowances on cars in the UK, reflecting the latest HMRC rules and regulations as of April 2025.

What Are Capital Allowances?

Capital allowances are a form of tax relief that allows businesses to deduct the cost of certain assets against their taxable profits. For cars, these allowances effectively replace accounting depreciation, which isn't tax-deductible, with a system of tax-approved deductions.

Capital Allowances for Cars: The Basics

When your business purchases a car, you generally can't deduct the full cost against your taxable profits immediately (unlike with some other business assets). Instead, HMRC allows you to claim capital allowances over time using specific rates determined by the car's CO2 emissions.

Who Can Claim?

You can claim capital allowances on cars if you:

• Are a sole trader, partnership, or limited company
• Own the car (not leased)
• Use the car for business purposes

Current Rates and Thresholds

As of April 2025, capital allowances for cars are calculated based on the following CO2 emission thresholds:

New and Unused Cars

CO2 Emissions	Capital Allowance Rate	Allowance Type
0g/km (Zero emission)	100%	First Year Allowance (FYA)
1-50g/km	18%	Main Rate Pool
Over 50g/km	6%	Special Rate Pool

Used Cars

CO2 Emissions	Capital Allowance Rate	Allowance Type
0g/km (Zero emission)	100%	First Year Allowance (FYA)
1-50g/km	18%	Main Rate Pool
Over 50g/km	6%	Special Rate Pool

First Year Allowances for Zero-Emission Vehicles

The 100% first year allowance (FYA) for zero-emission cars is a significant tax incentive designed to encourage businesses to transition to electric vehicles. This allows businesses to deduct the full cost of an electric car from their profits before tax in the year of purchase.

Writing Down Allowances (WDA)

For cars that don't qualify for 100% FYA, you'll claim Writing Down Allowances through either the main rate pool (18%) or the special rate pool (6%), depending on the vehicle's CO2 emissions.

How Writing Down Allowances Work

1. The car is added to the appropriate capital allowance pool based on its CO2 emissions
2. Each year, you can claim a percentage of the remaining balance as a deduction
3. The percentage is either 18% (main rate) or 6% (special rate)
4. The pool's value reduces by the amount claimed
5. This continues year after year until the car is sold or disposed of

Example Calculation - Main Rate Pool (18%)

Cars with Private Use

If a car is used partly for private purposes, you need to adjust the capital allowances claim accordingly:

1. Calculate the capital allowance as normal
2. Reduce the allowance by the percentage of private use

For example, if a car is used 75% for business and 25% for private purposes, you would reduce your capital allowance claim by 25%.

Leased Cars

Different rules apply for leased cars:

• For cars with CO2 emissions exceeding 50g/km, only 85% of the lease payments are allowable as a business expense
• For cars with CO2 emissions of 50g/km or less, 100% of the lease payments are allowable
• For zero-emission cars, 100% of the lease payments are allowable

Balancing Charges and Allowances

When you sell or dispose of a car, you need to calculate a balancing adjustment:

1. If the sale proceeds are less than the remaining pool value, you can claim a balancing allowance
2. If the sale proceeds exceed the remaining pool value, you'll have a balancing charge (effectively a taxable profit)

Special Cases: Sole Traders and Partnerships

If you're a sole trader or in a partnership and use your car for both business and private purposes, you have two options:

1. Capital Allowances Method: Add the car to your capital allowance pool and claim based on business use percentage
2. Simplified Expenses Method: Claim a flat rate per business mile (45p for the first 10,000 miles, 25p thereafter)

Low-Emission Cars and Business Tax Benefits

Beyond capital allowances, low-emission cars provide additional tax benefits:

• Lower Benefit in Kind (BiK) rates for company car tax
• Reduced Class 1A National Insurance contributions for employers
• Potentially lower Vehicle Excise Duty (road tax)
• Exemption from certain congestion and emissions charges in cities

Claiming Process

To claim capital allowances on cars:

1. Keep detailed records of purchase costs, dates, and CO2 emission figures
2. Maintain logs of business vs private mileage if applicable
3. Include the claim on your Self Assessment tax return (sole traders and partnerships) or Company Tax Return (limited companies)
4. Submit all claims within the specified time limits

Record Keeping Requirements

HMRC requires you to maintain the following records for capital allowances claims:

• Purchase invoices and documentation
• CO2 emission certification
• Business mileage logs (for partial private use)
• Proof of business use
• Disposal or sale documents

All records should be kept for at least 6 years after the end of the tax year they relate to.

Strategic Considerations

Timing Your Purchase

The timing of vehicle purchases can significantly impact your tax position:

• Consider purchasing zero-emission vehicles before the FYA deadline (currently April 2027)
• Plan purchases near the end of your accounting period to maximize the initial allowance
• For businesses expecting lower profits in the future, deferring purchases might be beneficial

Choosing Between Purchasing and Leasing

The decision between purchasing and leasing should consider:

• Cash flow implications
• Available capital allowances
• Expected period of vehicle use
• Anticipated residual value
• Maintenance and servicing requirements

Maximizing Tax Efficiency

For optimal tax efficiency:

• Consider electric or ultra-low emission vehicles to benefit from higher allowances
• Regularly review your fleet to ensure you're maximizing available allowances
• Track technological developments in the automotive industry that might influence future allowance rates

Recent and Upcoming Changes

The government regularly reviews and adjusts capital allowances as part of its environmental and fiscal policies. Recent developments include:

• Extension of the 100% FYA for zero-emission cars until April 2027
• Gradual reduction of CO2 emission thresholds over time
• Increased focus on incentivizing ultra-low and zero-emission vehicles

Common Mistakes and How to Avoid Them

Incorrect Pool Allocation

Ensure you correctly identify the CO2 emissions of each vehicle and allocate them to the appropriate pool.

Failure to Adjust for Private Use

Remember to adjust your capital allowance claims for any private use of business vehicles.

Missing Documentation

Maintain comprehensive records of all vehicle purchases, CO2 emissions, and business usage to support your claims.

Overlooking Balancing Adjustments

Don't forget to calculate and report balancing charges or allowances when disposing of vehicles.

Conclusion

Understanding capital allowances for cars is essential for tax-efficient business planning. With the government's continued focus on reducing carbon emissions, the tax advantages for low and zero-emission vehicles are likely to remain significant in the coming years.

By staying informed about the current rates and thresholds and planning your vehicle acquisitions strategically, you can maximize your tax benefits while contributing to environmental sustainability.

Further Resources

• HMRC Capital Allowances Manual
• GOV.UK Business Tax Guide
• Consult with a qualified accountant or tax advisor for personalized advice