Capital Allowances on Cars and Vehicles

Company car or personal car?

For limited company directors, the first question is usually not just whether the company gets tax relief. It is whether the company should own the car at all. A company car can give Corporation Tax relief through capital allowances, but private use normally creates a Benefit in Kind (BIK) charge and can also mean employer Class 1A National Insurance. If you own the car personally, the company may instead reimburse business journeys using HMRC-approved mileage allowance payments.

The right answer depends on the car, the emissions figure, the business mileage, how much private use there is, VAT recovery, and how the decision fits with salary, dividends and pension contributions. We would model those together before the company signs the finance agreement.

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

For capital allowances, vans, lorries and trucks are not treated as cars where the vehicle is constructed primarily for carrying goods or burden. Vans can therefore qualify for Annual Investment Allowance, and for Full Expensing where the company conditions are met.

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. The allowance is currently extended to expenditure incurred up to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.

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. Transitional rules apply where the contract was entered into before 1 April 2025 for Corporation Tax or 6 April 2025 for Income Tax and the expenditure is incurred before 1 October 2025. Benefit in Kind transitional rules are separate and can apply until the earlier of disposal, lease expiry or 5 April 2029.

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.