Capital Allowances For Cars: What Does it Mean?

Capital allowances can be complex but valuable for reducing your tax bill. This article will explain car capital allowances and how buying or using a vehicle can significantly impact your taxes.

Let’s learn about the capital allowance for cars and what it means for you.

• Capital Allowance: What does it mean?
• How Many Types of Capital Allowances Can You Claim for a Business Car?
• Can I Work Out My Writing Down Allowances?
• CO2 doesn’t apply to such vehicles

Here’s a glance at what we’ll cover:

Capital Allowance: What does it mean?

Capital Allowances are tax reliefs for businesses that invest in long-term assets. These are also fixed assets; you can keep them within your company for over 12 months. When you claim capital allowances, you might be deducting part of the value of your profit. That means you have to pay tax as your overall profit has decreased. It gets complicated because of the different types of capital allowances with varying eligibility criteria.

In some scenarios, you can also write off the entire cost of an asset in one year, which can help reduce the tax bill. The other assets are specially recognised for wear and tear or depreciation over time. So, in such cases, you will offset a percentage of the asset value against your tax bill. This will be implemented every year you own it, giving you tax relief over a more extended period.

How Many Types of Capital Allowances Can You Claim for a Business Car?

The type of capital allowance that you can claim for your car never gets complicated.
– It’s a choice between the two
– Writing the Allowances
– Getting 100 percent first-year allowance.

Let’s explain both in detail.

Writing the Allowances

Writing allowances are a standard capital allowance that allows you to deduct a percentage of your car’s value from your profit annually. Most cars fall within the main rate pool, but this comes solely from your car’s CO2 emission.

If you haven’t purchased a business car yet, this can be essential in deciding what to buy.

Can I Work Out My Writing Down Allowances?

Depending on your car’s CO2 emission, there are three different rates and pools.

• The first-year allowance should be 100%
• Main Rate Allowance
• Special Rate Allowance

You will fall either for the central rate allowance or the unique rate pool for writing down allowances unless the asset qualifies for the 100 percent first-year allowance.

Here’s the table showing the tax relief you can claim for your car if it is purchased after April 2021.

Rates and Pools	Tax Relief to Claim	CO2 Emission
Primary Rate	18%	50g/km or less
Special Rate	6%	50g/km or more

Second-hand electric and new and second-hand cars with CO2 emissions of 50g/km or less are subject to main rate allowances. On the other hand, new or second-hand vehicles over 50g/km or less can claim a special rate allowance.

100% First Year Allowance

You are entitled to a first-year allowance if you
Have a new, unused electric car
Or have a car with zero CO2 emission.

How Can I Work with my 100% First Year Capital Allowance?

This process is easy. Let’s explain this with an example.

Suppose you buy an electric car worth £20000. You’ll be entitled to a 100% first-year allowance.

In that tax year, you can write off the full amount of £20,000 for your electric car from taxable profits. This can also create a massive dent in the tax bill.

• Type of Vehicle
• Capital Allowance Type
• Electric Cars
• For electric cars, there will be a 100% yearly allowance for new and unused vehicles.
• Hybrid/ Standard Cars
• This depends on the CO2 emissions. Anything less than 50g/km means you can claim the central rate allowance of 18%. Emissions over this can lead to a special rate allowance.
• Commercial Vehicles
• Commercial vehicles, such as vans, black cabs, and trailers, are entitled to annual investment allowances for business purposes.

CO2 doesn’t apply to such vehicles

Claim Capital Allowances for my Business car as an employee

Capital Allowances never apply to employees, even if you use your vehicle solely for business purposes. Other company benefits will be discussed with your employees.