Buying a car (capital allowances)

Conditions

• 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).
• 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. 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.
• 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 April 2026 (reduced from 18%, which had applied since 2012). You write down the remaining pool value each year, so full relief is recovered over time.
• 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, with nearly £17,200 unrelieved going into year two.
• 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 for that vehicle's lifetime. 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.
• 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.
• Employees who own a car and use it for their employment duties can technically claim capital allowances under EIM36200, subject to the same CO2-based pool rules and with no access to the AIA. In practice, the approved mileage allowance (55p/mile up to 10,000 miles) is simpler and more beneficial for the vast majority of employees, and capital allowances on a personally owned car are very rarely claimed.

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 — the choice of method is irrevocable for the life of the vehicle.
• 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. She claims the 100% first-year allowance and deducts the entire £38,000 from her trading profits in 2026/27. A colleague buys a new petrol car emitting 105g/km for £20,000. 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