Capital Allowances on Cars and Vehicles

1. Cars: the CO2 Matrix

Cars do not qualify for AIA or Full Expensing. They are capital allowances territory, but the applicable rate depends entirely on CO2 emissions. For expenditure incurred from April 2021, the position is:

A £50,000 car at 120 g/km purchased by a company in the special-rate pool gives just £3,000 of relief in year one (6% of £50,000), very different from a van of similar value, where AIA delivers the full £50,000 in the same period. The car rules are one of the main reasons commercial fleets favour vans over cars where the work allows.

2. Vans: Simple and Generous

A van is a commercial vehicle: a goods vehicle with an unladen weight not exceeding 3,500kg (or up to 7,500kg for "heavier" commercial vehicles). Vans qualify for AIA at 100% up to the £1 million cap, and for Full Expensing where the van is new and purchased by a company.

For an owner-managed business using vans in the trade, construction, courier, trades, mobile services, the van route is materially more tax-efficient than the equivalent car. The benefit-in-kind treatment is also different and usually more favourable: a flat van benefit plus a fuel benefit, rather than a CO2-driven percentage of list price.

3. Electric Vehicles and FYA

Zero-emission cars qualify for a 100% first-year allowance, provided the car is new and unused (not second-hand). The 100% FYA for zero-emission cars is legislated to apply to expenditure incurred until 31 March 2025 for corporation tax and 5 April 2025 for income tax, with continued extensions announced in recent Budgets.

Zero-emission goods vehicles (electric vans) continue to qualify for AIA and Full Expensing, same rules as any other van. Electric vehicle charging points installed at business premises also qualify for a 100% first-year allowance under separate provisions in the Capital Allowances Act.

4. Double-Cab Pickups

Double-cab pickups sit awkwardly between cars and vans. Historically, HMRC treated them as vans for both benefit-in-kind and capital allowances purposes provided the payload exceeded 1 tonne. The October 2024 Budget confirmed a significant change: from 1 April 2025 (6 April for income tax), double-cab pickups with a payload of 1 tonne or more are treated as cars for capital allowances purposes, not vans.

The change removes the AIA and Full Expensing eligibility and puts pickups back into the CO2-based car rate structure. Pickups purchased or contractually committed to before the transition date remain on the old van-style treatment for their useful life, so timing and contract dates on any outstanding pickup purchase matter.

5. Hire Purchase and Leasing

Capital allowances are available where the business owns or will own the vehicle. A vehicle on hire purchase qualifies because the HP contract envisages legal transfer at the end. A vehicle on an operating lease does not qualify, the lease rentals are deductible as revenue expenses instead, subject to the car lease restriction where applicable.

For leased cars above the 50 g/km CO2 threshold, 15% of the lease rentals is disallowed as a deduction, a proxy for the higher capital allowances restriction that would apply to a purchased equivalent. The restriction does not apply to cars at or below 50 g/km, reinforcing the tax incentive to favour lower-emission vehicles.

6. Disposal and Pool Mechanics

On disposal of a car in the main or special-rate pool, the disposal proceeds are deducted from the pool balance. If the pool goes negative, a balancing charge arises (taxable income). If the pool remains positive, the writing-down allowances continue at the applicable rate on the reduced balance.

For an electric car on which 100% FYA was claimed, a later disposal triggers a balancing charge equal to the sale proceeds, the same pattern as Full Expensing. A £40,000 EV fully relieved in year one and sold for £20,000 in year four gives rise to a £20,000 balancing charge in year four. This is consistent with the Full Expensing model: full upfront relief, with disposal proceeds brought fully back into charge.