If your business owns or uses cars, it’s important to understand how these assets are treated for tax purposes. Unlike other types of equipment, cars are treated differently under capital allowances rules — and the options available will depend on your business structure, how the vehicle is used, and even the car’s CO₂ emissions.
Here’s a breakdown of what businesses need to know when claiming capital allowances on cars in the 2025/26 tax year.
Why Cars Are Treated Differently
Cars don’t benefit from the same generous tax reliefs as many other assets. While businesses can usually claim Annual Investment Allowance (AIA) or even full expensing for machinery and equipment, cars are excluded from both of these unless they’re electric and brand new.
This means that if you’re buying a car through your business, the tax relief will likely come in the form of writing down allowances — unless you’re eligible for the 100% first-year allowance on electric vehicles.
No Annual Investment Allowance for Cars
The AIA allows many businesses to deduct the full cost of qualifying assets in the year they’re purchased — up to a limit of £1 million. However, this allowance does not apply to cars.
This is a key distinction:
- Vans and commercial vehicles do qualify for the AIA
- Cars do not, meaning the tax relief must be claimed over time unless the car qualifies for another scheme
Full Expensing and the 50% First-Year Allowance
For companies, full expensing and the 50% first-year allowance have been introduced to encourage investment in new plant and machinery. However, neither of these apply to cars, regardless of whether the car is new or second-hand.
100% First-Year Allowance – Only for New Electric Cars
There is one exception to the above rules: new fully electric cars. These qualify for a 100% first-year capital allowance, allowing the entire cost of the car to be deducted from taxable profits in the year of purchase.
To qualify:
- The vehicle must be brand new (not second-hand)
- It must be fully electric (not a hybrid)
- The purchase must meet specific environmental and usage conditions
If you’re planning to go green, this allowance provides significant upfront tax relief.
Writing Down Allowances for Other Cars
If your business car doesn’t qualify for the 100% first-year allowance, you’ll need to rely on writing down allowances (WDAs), which spread the cost over several years.
The rate depends on CO₂ emissions:
| CO₂ Emissions | WDA Rate | Type of Allowance |
| 0–50g/km | 18% per year | Main pool allowance |
| Over 50g/km | 6% per year | Special rate allowance |
These rates apply whether the car is new or second-hand, and whether it’s petrol, diesel, or electric (for second-hand EVs).
Sole Traders & Partnerships: Consider Simplified Expenses
If you’re a sole trader or part of a partnership, you may have a choice between claiming capital allowances or using the simplified expenses system.
This method allows you to claim tax relief based on your business mileage rather than the cost of the vehicle.
- 45p per mile for the first 10,000 business miles in the tax year
- 25p per mile for any additional business mileage
This approach is:
- Easy to calculate
- Avoids the need to track depreciation or asset value
- Cannot be used alongside capital allowances (it’s either/or)
If you opt for simplified expenses, you cannot also claim capital allowances, and vice versa.
Note: Limited companies cannot use simplified expenses — they must use capital allowances.
What About Private Use?
If a car is used for both business and personal journeys, only the business-use portion of the capital allowances can be claimed.
For example:
- If a car is used 60% for business and 40% for personal use,
- Only 60% of the writing down allowance can be deducted for tax purposes
This adjustment is common among sole traders but doesn’t usually apply to company cars unless the business allows personal use, in which case it becomes a benefit in kind and different rules apply.
What About the Cash Basis?
If you use the cash basis of accounting, which is common for smaller businesses, you cannot deduct the full cost of a car as a one-off expense. This is explicitly prohibited in the cash basis rules.
However, you can still claim capital allowances if the car qualifies, or you may choose to use simplified mileage rates if you’re eligible.
Final Thoughts
Cars come with a unique set of tax rules, and the type of car, how it’s used, and the structure of your business will all impact what reliefs you can claim.
- New electric cars offer the best upfront relief via the 100% first-year allowance
- High-emission cars may take many years to fully write down
- Sole traders should compare simplified expenses against capital allowances to see which is most beneficial
If you’re planning to purchase a car through your business, it’s essential to weigh up your options carefully to avoid missing out on valuable tax reliefs — or claiming incorrectly.
Need tailored advice on claiming capital allowances for your next vehicle purchase? Yorkshire Accountancy is here to help you drive through the complexity and make the most of your tax savings.
Partner note: CAA 2001, ss. 45D, 104A, 104AA, 268A, 268B and 268C.
