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 can agree a tax comparison before you decide how to buy or finance the vehicle.

1. Cars: emissions and tax relief

Cars do not qualify for the Annual Investment Allowance (AIA) or Full Expensing. Carbon dioxide (CO2) emissions determine the pool, while new and unused zero-emission cars can qualify for a first-year allowance (FYA). Other cars usually receive a writing-down allowance (WDA). The following rates apply in 2026/27, with a blended main rate for periods spanning the April 2026 change:

For a company with a twelve-month period, a £50,000 car at 120 g/km gives a £3,000 writing-down allowance at 6%, assuming no other special-pool movements. An eligible £50,000 van can receive a £50,000 deduction where sufficient AIA is available. These are deductions from taxable profit, not cash tax savings of the same amount.

2. Tax relief on vans

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.

Private use has separate rules. A van meeting the restricted private-use conditions can be exempt from a benefit charge. Where a charge applies, vans normally use a flat benefit amount rather than a percentage of the car list price. Zero-emission vans have their own treatment. Check the vehicle classification and actual use before comparing the tax cost.

3. Electric vehicles and first-year relief

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

Before April 2025, HMRC generally treated double-cab pickups with a payload of one tonne or more as vans for capital allowances. For expenditure from 1 April 2025 for Corporation Tax and 6 April 2025 for Income Tax, the vehicle's construction determines the treatment. HMRC expects most, if not all, double-cab pickups to be classified as cars because they are equally suited to carrying passengers or goods.

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 normally available to the business that owns or will own the vehicle. Hire purchase can qualify where the agreement provides for ownership to pass to the business. With an operating lease, the business usually claims the rental payments as an expense instead, subject to the business-use and car lease restrictions.

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. What happens when you sell the vehicle?

When you sell a car in the main or special-rate pool, deduct its disposal value before calculating the year's allowances. This is normally the sale proceeds, limited to the qualifying cost. If the deduction exceeds the available balance, the difference is added to taxable profits as a balancing charge. Otherwise, allowances continue on the remaining balance. Special rules apply to some transfers between connected people or businesses.

This also applies to an electric car that received a 100% first-year allowance. The car has no unrelieved cost, but other assets may leave a pool balance. A £20,000 sale reduces an available £30,000 balance to £10,000 without a balancing charge. With a nil balance, it creates a £20,000 charge. These examples assume a sale below the original qualifying cost and no other pool movements.

A car kept in a separate pool because of private use by a sole trader or partner has different disposal rules. Full Expensing also has separate disposal rules and is not available for cars.