Capital Allowances on Cars 2026/27: A Practical UK Guide

Quick answer

Capital allowances give a business tax relief for the cost of a car. Cars cannot use the Annual Investment Allowance, so relief normally comes through a writing-down allowance: you deduct a percentage of the car's value each year, set by its CO2 emissions. A new fully electric car can qualify for a 100% first-year allowance instead.

What capital allowances are

When your business buys a car, you do not simply deduct the purchase price from your profits the way you would deduct fuel or insurance. The car is a capital asset, so tax relief is delivered through the capital allowances regime. This spreads the relief over the years you own the car, with the amount each year depending on the type of car and how it is used.

Capital allowances on cars matter to two main groups: sole traders and partners, who relieve them against Income Tax and Class 4 National Insurance; and limited companies, which relieve them against Corporation Tax. The basic principles are shared, but the private-use treatment differs, as explained below.

The three CO2 categories

HMRC sorts cars into pools based on CO2 emissions, and the pool decides how quickly you get relief. There are three broad categories.

• Zero-emission cars (fully electric). A new and unused car here can qualify for a 100% first-year allowance, so the full cost is deductible in the year of purchase.
• Lower-emission cars. These go into the main pool and attract the standard writing-down allowance on a reducing balance.
• Higher-emission cars. These go into the special-rate pool and attract a slower writing-down allowance.

The exact CO2 thresholds that separate these categories are set by HMRC and are revised periodically. Because the boundaries move, do not assume last year's figure still applies. Check the current bands on gov.uk before you allocate a car to a pool, and keep the manufacturer's CO2 figure with your records.

How writing-down allowances work

A writing-down allowance (WDA) deducts a fixed percentage of the remaining value each year. Because it works on the reducing balance, the cash relief shrinks over time and the unrelieved balance simply carries forward until the car is sold or the business ends.

The principle is easiest to see with a worked illustration. Suppose a car costs GBP 20,000 and sits in a pool with a 10% writing-down rate. The relief would run like this:

The 10% rate above is illustrative only, used to show the reducing-balance mechanism. The actual rate for your car depends on its CO2 pool, so confirm the current main-pool and special-rate percentages on gov.uk before you compute your own figures.

The 100% first-year allowance for electric cars

A new and unused fully electric car can qualify for a 100% first-year allowance. That means the entire cost is deductible against profits in the year of purchase, rather than dribbled out over many years through a writing-down allowance. For a profitable business this is a substantial cash-flow benefit.

Two conditions are worth stressing. First, the car must generally be new and unused -- a second-hand electric car does not qualify for the 100% first-year allowance and instead goes into a pool. Second, this is an area where government policy has changed before and may change again, so the availability and the qualifying emissions level should be verified on gov.uk at the time of purchase.

Private use and the sole-trader restriction

If you are a sole trader or a partner and the car is used partly for private journeys, you cannot claim the full allowance. You must restrict it to the business proportion. If 70% of your mileage is for business, you claim 70% of the calculated allowance and the remaining 30% gets no relief.

This makes a mileage log essential. Without evidence of the business-use split, HMRC can challenge the proportion you have claimed. A car used partly privately is also kept in its own single-asset pool so the restriction can be applied cleanly each year.

For company-owned cars the position is different. The company claims the full allowance with no private-use restriction, but the employee or director who has private use of the car faces a separate benefit-in-kind charge through the company-car rules. That benefit is taxed on the individual and the company also pays employer National Insurance on it, so the overall picture needs to be weighed up before a company buys a car.

The mileage alternative

Many sole traders skip capital allowances altogether and use the simplified mileage method instead. Under the Approved Mileage Allowance Payments (AMAP) rates you claim a flat amount per business mile, which covers the cost of running the car including depreciation.

If you use the mileage method you cannot also claim capital allowances or actual running costs for that vehicle. The choice is broadly made when the car first enters the business and tends to continue for that vehicle, so it pays to estimate both routes over the car's expected life. Low-mileage, high-cost cars often favour actual costs and allowances; high-mileage, modest-cost cars often favour the flat rate.

To compare the two approaches against your own profit, the

calculator lets you see how each deduction flows through to your Income Tax and Class 4 National Insurance. Companies should model the effect on profit using the calculator instead.

Selling or stopping use of the car

When you sell a business car, or stop using it for the trade, you compare the proceeds with the unrelieved balance carried in the pool. If proceeds are lower than the balance, you may be entitled to a balancing allowance for the shortfall. If proceeds are higher, a balancing charge is added to your taxable profit to claw back excess relief.

For a single-asset pool -- such as a car with private use -- this calculation is done car by car. For cars sitting in the main or special-rate pool, the proceeds are usually deducted from the pool balance and the adjustment washes through over time rather than producing an immediate balancing figure. Keep clear records of original cost, allowances claimed and disposal proceeds so the final position can be worked out accurately.

Companies versus sole traders

The table below summarises the key differences in how the two business types handle car capital allowances.

For companies, Corporation Tax is charged at 19% on profits up to GBP 50,000 and 25% on profits above GBP 250,000, with marginal relief easing the rate between those points. The value of a car allowance to a company therefore depends on where its profits sit within that range.

Practical checklist

Before you claim, run through these points.

• Confirm whether the vehicle counts as a car or as a van, lorry or motorcycle, as the AIA position differs.
• Find the manufacturer's CO2 figure and check the current pool thresholds on gov.uk.
• For an electric car, verify it is new and unused and that the 100% first-year allowance still applies.
• Decide between actual costs plus allowances and the AMAP mileage method, and keep the records to support either.
• For sole traders, keep a mileage log to justify the business-use proportion.
• Keep purchase invoices and, eventually, disposal proceeds so balancing adjustments can be calculated.

Final word

Capital allowances on cars reward lower-emission choices and penalise delay through the reducing-balance mechanism. The single most useful habit is good record-keeping: CO2 figures, business mileage and the running pool balance. Because the CO2 thresholds and first-year allowance rules shift over time, treat gov.uk as the authoritative source for the current bands, and use the calculators above to see how the relief actually changes your tax bill.