Business woman in purple shirt holding blue files

What capital allowances can I claim on my car?

August 1, 2022
There are a fair few perks that come with being self-employed, and the freedom to travel is certainly one of them. Whether that means visiting clients in person or delivering goods directly to your clients’ doors, there’s something about leaving the office that makes work more exciting.However, while you’re running up the miles, you’re also running up your business expenses. Aside from paying for fuel and car tax, you’ll also need to consider the costs of keeping your car in good shape — or eventually getting a new car altogether.Luckily, using your car for business purposes doesn’t only help you get from A to B faster, but can also help you cut down on your tax bill. We’ll be covering everything you need to know about claiming capital allowances on your company car, what exactly you can claim and how to do so.

What are capital allowances?

Before we dive into how to claim capital allowances on your car, you’ll probably want to know what capital allowances are first.
Capital allowances are tax breaks offered to business owners on their investments in assets intended for long-term use. These breaks allow business to deduct up to 100% of the cost of an asset from their total profits, subsequently lowering their taxable profit and the amount owed in Income Tax or Corporation Tax.

For a more in-depth explanation of what exactly capital allowances are, Chartered Accountant and Ember co-founder Dan Hogan gives an overview in the video below:
Capital allowances can be claimed on items that are classified as ‘plant and machinery’, bought with intention to be used solely for business purposes. Plant and machinery assets include:
    EquipmentMachineryBusiness vehicles

Can I claim capital allowances on my car?

Cars fall into the ‘plant and machinery’ category, meaning you can claim capital allowances on cars you use in your business.There are, however, a few conditions that you’ll need to meet before making a claim, namely:
    You haven’t already claimed tax relief for your car in a different way if you’re a sole trader or partner You’re not an employee — if you are, you may be able to claim for business mileage and fuel costs instead Your business vehicle is considered a car for capital allowances purposes

What classifies as a car?

For tax purposes, a car is classified as a vehicle that:
    Is suitable for private use, including motorhomesUsed privately by most peopleWasn’t built to transport goods

What does not classify as a car?

The following vehicles do not, for tax purposes, classify as a car:
    Motorcycles bought after 6th April 2009LorriesVansTrucks
Since these vehicles don’t count as cars, you can instead claim Annual Investment Allowance (AIA) on them.
Ember red car

How do I claim capital allowances on my car?

Like any other business expense you’re looking to claim, you’ll need to claim this on your tax return at the end of the year. Depending on your business structure, this will be:
    On your Self Assessment tax return if you’re a sole trader A partnership tax return if you’re a partner Your Company Tax Return if you’re a limited company, including separate calculations for capital allowances

How much can I claim on my car?

To work out exactly how much you can claim on your business car, you’ll need to follow these steps:
    Take the closing balance from your last accounting period (either the beginning of the financial year, or the year from the date you started your business)Find out both the value and CO2 emissions of your business carPlace the item in the appropriate ‘pool’Use the rate of the associated pool to work out how much you can claimDeduct on your profits before tax on your tax return to get your taxable profitAny amount left over in the ‘pool’ becomes the starting balance for your next accounting period
    You owned it before you started using it in your businessIt was a gift
Next, you’ll need to work out your car’s CO2 emissions and find the date you purchased the car. This, along with the value of your business car will determine the pool you’ll need to assign your car to.In the context of capital allowances, a ‘pool’ is a category assigned to certain items that match that pool’s specific set of criteria. These pools, in turn, are associated with a percentage rate which determines how much of that item’s value you can claim capital allowances on.The percentage values for each type of allowance are as follows:
    100% of the car’s value as first year allowances18% of the car’s value as main rate allowances6% of the car’s value as special rate allowances
You can find out exactly what you can claim depending on the year you purchased your car on the HM Revenue and Customs (HMRC) website, with the allowances for cars bought from April 2021 outlined in the table below:
Car descriptionClaim
New and unused, CO2 emissions are 0g/km (or car is electric)First year allowances
New and unused, CO2 emissions are between 1g/km and 50g/kmMain rate allowances
Second hand, CO2 emissions are between 1g/km and 50g/km (or car is electric)Main rate allowances
New or second hand, CO2 emissions are above 50g/kmSpecial rate allowances
Source: GOV.UK

If you’re running a limited company, main and special rates will apply from 1st April, whereas if you’re a sole trader or a partner, these rates will apply from 6th April. The first year allowances rate applies to all businesses from 1st April.
Before making your claim, keep in mind that if you claim capital allowances on your car, you won’t be able to claim simplified expenses for the same vehicle, and vice versa.

To find out whether it’s more tax efficient to claim capital allowances or simplified expenses on your car, book a call with one of our accountants today for tax optimisation advice and more.

First year allowances

As part of the government’s initiative to get more green cars on the road, electric cars and cars with zero CO2 emissions qualify for ‘enhanced capital allowances,’ a type of first year allowance, or FYA, which allows you to deduct the full cost (100%) from your profits before tax.If you don’t want to claim the full value of your business car just yet, you can claim part of the cost in your next accounting period using writing down allowances (WDA), which allow you to deduct a percentage of the value of an item from your profits in that tax year.

Using your car outside of your business

If you’re a sole trader or a partner and have a car that you use for both personal use and business use, you’ll need to create a separate single asset pool.Depending on the criteria outlined in the table above, you’ll need to work out your capital allowances at either the main rate or special rate.From there, you’ll need to reduce the amount of capital allowances you can claim by the amount you use the asset outside of your business.For example, if you use your car to visit clients 2 days of the week and then use the same car for personal use 1 day a week, you’ll need to reduce the amount of capital allowances you can claim by 33%.

Join us in creating the new age of accounting.

Simple language, simple software, so that you can spend less time dealing with admin and more time focusing on what really matters.