Buying a car (capital allowances)

Conditions

1. Cars do not qualify for the Annual Investment Allowance (AIA). Unlike vans, lorries and most other plant and machinery, cars must go through the capital allowances pool system. This means the cost cannot be deducted in full in the year of purchase (except where a first-year allowance applies — see below).
2. A new, unused car with zero CO2 emissions (a fully electric car) qualifies for a 100% first-year allowance (FYA), giving full relief in the year of purchase, provided the expenditure is incurred by 31 March 2027 for Corporation Tax or 5 April 2027 for Income Tax. This applies to sole traders, partnerships and limited companies alike. A second-hand electric car does not qualify for the 100% FYA; it goes into the main pool instead.
3. Cars purchased from April 2021 with CO2 emissions of 1–50g/km are placed in the main capital allowances pool. The writing-down allowance (WDA) on the main pool is 14% per year from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax (reduced from 18%, which had applied since 2012), with a hybrid rate for chargeable periods that span those dates. You write down the remaining pool value each year, so full relief is recovered over time. If you're a sole trader or partnership and also use the car privately, it goes in its own separate pool instead, at the main or special rate as appropriate, and the allowance is reduced for private use.
4. Cars with CO2 emissions above 50g/km are placed in the special rate pool, which has a WDA of only 6% per year. Relief accrues very slowly: a car costing £20,000 in this pool would have approximately £1,200 of allowances in year one (assuming a 12-month accounting period and full business use), with £18,800 unrelieved going into year two.
5. Sole traders who use the simplified mileage method (55p/mile for the first 10,000 business miles in 2026/27, then 25p/mile) cannot also claim capital allowances on the same car. You must choose one method for each vehicle and stick with it as long as you use that vehicle for your business. Under the cash basis, cars remain subject to capital allowances pool rules — they are not simply expensed in the year of payment, unlike most other capital items.
6. For a limited company, capital allowances on the car are claimed in the corporation tax computation. Private use of the car by a director or employee creates a separate company car benefit-in-kind charge, calculated on the car's list price and CO2 emissions. The capital allowances and the benefit-in-kind regimes are independent — the company claims the allowances in full even if the car is also used privately.
7. Employees cannot claim capital allowances on a car they own and use for their job. GOV.UK states that an employee "cannot claim capital allowances for cars, motorbikes and bicycles you use for work", and HMRC's Employment Income Manual (EIM36520, EIM36750) confirms the only tax relief for using your own vehicle for work is mileage allowance relief. For 2026/27 the approved rate for cars is 55p per business mile for the first 10,000 miles and 25p after that. You claim relief on the approved amount minus anything your employer pays you, and the rate covers the cost of owning and running the car.

Common mistakes

• Claiming the AIA on a car — cars are explicitly excluded from the AIA by statute (Capital Allowances Act 2001 s38B). Vans and other commercial vehicles are not subject to this restriction.
• Applying the 100% first-year allowance to a second-hand electric car — the 100% FYA is only available for new and unused zero-emission vehicles.
• Mixing the mileage method and capital allowances for the same car — once you choose a method for a vehicle, you must stick with it as long as you use that vehicle for your business.
• Failing to restrict writing-down allowances for private use on a sole trader's car — the business-use proportion must be applied before deducting the allowance against profits.

What to keep

• Purchase invoice or finance agreement showing the car's purchase price.
• V5C registration document confirming the car's CO2 emissions figure (used to assign the correct pool).
• Business mileage log or diary to support the private-use apportionment claimed.

Real-world example

A sole trader buys a new fully electric car for £38,000 in October 2026, for use only in her business. She claims the 100% first-year allowance and deducts the entire £38,000 from her trading profits in 2026/27 (assuming her accounts are drawn up to the end of the 2026/27 tax year). A colleague buys a new petrol car emitting 105g/km for £20,000, also for business use only. It goes into the special rate pool; she claims 6% WDA (£1,200) in year one, with £18,800 carried forward into future years.

Frequently asked

Related allowances