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Claiming capital allowances on cars

August 1, 2022There 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 company car in good shape — or eventually getting a new company 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 cars, what exactly you can claim and how to do so.

What are capital allowances?

Before we dive into how to claim capital allowances on cars, you’ll probably want to know what capital allowances are first.

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 you claim capital allowances on cars?

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:

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.

How to claim capital allowances on cars

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:

How much tax relief 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

In most cases, the value of your business car will be the amount you paid for it, but you’ll need to use the market value — the amount you’d expect to sell it for — if:

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: 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.

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 you claim in capital allowances on cars by 33%.