When your business buys a car, the value starts dropping the moment you drive it off the forecourt. While your accountant calls this depreciation, HMRC calls it Capital Allowances – and understanding how they work is the key to turning that loss into a significant tax saving. Because you can't simply deduct a car’s falling value from your taxable profits, you must navigate a specific set of rules based on the vehicle’s CO2 emissions.
Over 60% of cars on the UK’s roads are used for business purposes, so capital allowances play a big role in supporting economic growth. If you’re buying or leasing a car for your business, understanding capital allowances could save you thousands in tax.
In this article, we’ll explain what capital allowances are, how they work, who can claim capital allowances on cars, if you can claim capital allowance on your car, and how to claim them.
In a nutshell: Capital allowances let you claim tax relief on the cost of a business-owned car, with the biggest savings for electric cars. How much you can claim will depend on the car’s CO2 emissions, whether it’s new or used, your business structure, and how much you use it for business.
What are capital allowances?
Capital allowances let businesses claim tax relief on the cost of assets including cars. Unlike most equipment, cars can’t use the Annual Investment Allowance (AIA), which lets you deduct the full cost of assets up to £1 million in one go.
Instead, you claim relief through car-specific capital allowances. This usually means deducting a percentage of the cost each year. But if you buy a new electric car, you can claim the full cost upfront in the first year.
What qualifies as a ‘car’ for tax purposes?
HMRC defines a car eligible for capital allowances as a vehicle that:
Is suitable for private use
Is normally used on public roads
Isn’t a goods vehicle (like a van or lorry)
Vans and commercial vehicles usually qualify for different tax relief, like the Annual Investment Allowance (AIA).
How do capital allowances work for cars?
The amount of tax relief you can claim depends on your car’s CO2 emissions and whether it’s new or used. Cars are grouped into the following three categories.
First Year Allowances (FYA) – 100% for low or zero-emission cars
If you buy a new and unused electric car (or a zero-emission vehicle), you can claim 100% of the cost in the first year. This is called the First-Year Allowance (FYA).
Example: If you buy a new electric car for £45,000, you can deduct the full £45,000 from your taxable profits in the first year. At a 25% corporation tax rate, that’s an £11,250 tax saving – this rule is in place until April 2027, so now could be an opportune time to invest in an EV.
Main Pool – for cars with emissions up to 50 g/km
If your car doesn’t qualify for FYA, it goes into the ‘main pool’. This includes:
Second-hand electric cars
New or used cars with CO2 emissions of 50 g/km or less
You can claim 14% of the car’s value each year (from April 2026). This is called a ‘writing down allowance.’
Example: A £30,000 car with emissions of 45 g/km would give you a £5,400 tax deduction in the first year (18% of £30,000).
Special Rate Pool – for high-emission cars
Cars with CO2 emissions over 50 g/km go into a ‘special rate pool’ where you can only claim 6% of the car’s value each year.
Example: A £30,000 car with emissions of 120 g/km would give you just £1,800 in tax relief in the first year.
When can you claim capital allowances on a car?
You can claim capital allowances on a car if your business owns it and uses it at least partly for business purposes. But how much you can claim depends on your business structure.
If the car is owned through your business
Limited companies
Limited companies can claim full capital allowances (First Year Allowance, main rate, or special rate) if the car qualifies. But any personal use is taxed separately as a Benefit-in-Kind (BiK).
Sole traders and partnerships
If you're a sole trader or in a partnership, you can only claim capital allowances for the business portion of the car’s use. You’ll need to track your mileage to work out the business percentage.
Example: If you use your car 60% for business, you can only claim 60% of the capital allowances.
If you lease the car
You usually can’t claim capital allowances on a standard short-term lease. Instead, you can deduct the lease payments as a business expense.
The exception is a long finance-type lease or hire purchase, where HMRC might treat it like a purchase. But this is rare for most business car leases.
If you buy the car personally
You can’t claim capital allowances if you own the car personally. Instead, you can claim mileage allowance for business trips. The current rate is 45p per mile for the first 10,000 miles, then 25p per mile after that.
Example: If you drive 12,000 business miles in a year, you can claim £4,500 for the first 10,000 miles and £500 for the next 2,000 miles, totaling £5,000.
Special rules for claiming capital allowances on electric cars
Electric cars used for business qualify for the most generous tax relief. These rates apply regardless of your business structure:
100% First Year Allowance if new, unused, and zero-emission
18% main rate if second-hand (or the prevailing main-pool rate)
Even if you use the car personally, you can still claim allowances. Sole traders and partnerships will need to adjust the claim for the private use portion.
How to claim capital allowances on cars
Claiming capital allowances on a car is straightforward. Simply follow these steps.
Step 1: Check your car’s emissions
Find out your car’s CO2 emissions to determine which ‘pool’ it goes into.
CO2 Emissions | Capital allowance pool | Details |
|---|
0g/km (new and unused electric/zero-emission cars) | First Year Allowance (FYA) | 100% deduction in the first year |
0g/km (second-hand electric cars) | | 18% writing-down allowance per year |
| | 18% writing-down allowance per year |
| | 6% writing-down allowance per year |
These thresholds and rates can change, so check the current HMRC guidance for the year you buy the car.
You can usually find your car’s CO2 emissions in the vehicle logbook (V5C) or on the manufacturer’s website.
Step 2: Work out the business use percentage
If you’re a sole trader or in a partnership, you’ll need to track your mileage and work out how much you use the car for business. You then only claim capital allowances on that business use proportion.
Example: If you drive 15,000 miles in a year and 9,000 of those are for business, your business use percentage is 60%.
Step 3: Calculate the allowance
Once you know which pool your car goes into and the business use percentage, you can calculate the allowance.
Example 1: New electric car (100% FYA)
Car cost: £40,000
Business use: 100%
FYA: £40,000 (100% of £40,000) claimed in the year you buy the car
Example 2: Used petrol car (special rate pool)
Car cost: £20,000
Business use: 60%
Year 1 allowance: £720 (6% of £20,000 x 60%)
In later years you apply 6% to the remaining tax written‑down value and still restrict it to 60% business use.
Step 4: Include it in your tax return
Finally, you need to include the capital allowances in your tax return.
Sole traders/partnerships: Include it in the ‘capital allowances’ section of your Self Assessment tax return, after restricting for any private use
Limited companies: Include it in your corporation tax computation (CT600), using the pooled figures (no restriction for employees’ private use on company‑owned cars)
What happens when you sell your company car?
If you sell a car that you’ve already claimed capital allowances on, you’ll need to adjust your tax relief. The rules depend on whether the car was in a pooled arrangement or a single-asset pool.
For pooled cars (typically limited companies)
If your car was in the main or special rate pool:
The sale price reduces the pool balance
There’s no balancing allowance or charge unless the pool balance drops to zero
Example: Your company has a special rate pool balance of £20,000. You sell a car for £8,000. The pool balance reduces to £12,000, and you claim 6% of £12,000 in future years.
For single-asset pools (sole traders/partnerships with private use)
If your car was in a single-asset pool (because of private use):
You compare the sale price to the car’s tax written-down value
If the sale price is less than the tax value, you get a balancing allowance (restricted to business use proportion)
If the sale price is more than the tax value, you pay a balancing charge (restricted to business use proportion)
Example: You bought a car for £30,000 and claimed £18,000 in capital allowances. The tax written-down value is £12,000. If you sell it for £10,000, you get a balancing allowance of £2,000 (£12,000 - £10,000) – but only the business-use proportion is claimable.
Other tax considerations for company cars
Capital allowances aren’t the only tax rule to think about when it comes to company cars. Here are a few other things to consider:
Benefit-in-Kind (BiK)
If you or your employees use a company car personally, you’ll pay income tax on the benefit – called Benefit-in-Kind (or BiK). The amount will depend on the car’s CO2 emissions and list price – electric cars have much lower BiK rates than petrol or diesel cars.
Bear in mind that BiK rates increase annually. For example, the zero-emission rate rises by 1% each year from its 2022/23 base of 2%, reaching 3% in 2025/26, 4% in 2026/27, and continuing upward until it aligns more closely with other vehicles.
Example: A £40,000 electric car with 0g/km CO2 emissions has a BiK rate of 3% for 2025/26. That means you’ll pay income tax on £1,200 (3% of £40,000). If you’re a 20% taxpayer, that’s £240 in tax for the year. Compare that to a £40,000 petrol car with 120g/km CO2 emissions, which has a BiK rate of 30%. That’s £12,000 in taxable benefit, or £2,400 in tax for a 20% taxpayer.
Fuel and charging
Company cars come with separate rules for petrol and diesel versus electric, which affects employee tax and employer NIC.
Petrol/diesel: If your company pays for private fuel, there’s an extra tax charge
Electric: Workplace charging is usually tax-free for employees
Example: If your company pays for your home charging, it’s usually tax-free. But if they pay for your personal fuel, you’ll pay extra tax.
Wrapping up
If you plan on buying a car for business use, capital allowances could save you thousands in tax. This can help reduce your tax bill, improve cash flow, and make greener choices more affordable.
Here’s a reminder of the key points:
Capital allowances let you claim tax relief on the cost of a business car
Electric cars (EVs) get the best tax breaks – 100% first-year allowance if new and unused, or 18% main rate if second-hand
Personal use affects claims – sole traders/partnerships need to adjust for private mileage, while companies claim in full and handle private use via Benefit-in-Kind tax
Leased cars don’t qualify for capital allowances, but lease payments can be deducted as a business expense
Selling a company car? Adjust your tax relief based on the sale price and whether it was pooled or in a single-asset pool
Capital allowances can save your business thousands, but keeping track of expenses and claims can be tricky. Tide’s accounting software makes it easy to log mileage, track expenses, and stay on top of your tax obligations. Plus, with Making Tax Digital support, you can submit your tax returns seamlessly.
Looking to finance a new business car? Check your eligibility for vehicle finance to help you spread the cost.
Photo by Francesco Vantini on Unsplash
