Capital Allowances for Company Cars and Vans

Overview

Capital allowances enable businesses to obtain tax relief on qualifying expenditure on assets used in their business, including company cars, vans and certain electric vehicle charging equipment.

The amount and timing of tax relief depend on the type of vehicle, its CO₂ emissions, whether it is new or used, the funding method and the applicable tax rules.

Different rules apply to cars and commercial vehicles. New zero-emission cars can qualify for a 100% First-Year Allowance, while vans may qualify for the Annual Investment Allowance or other plant and machinery allowances.

Understanding capital allowances is important when comparing outright purchase, hire purchase, finance lease and contract hire arrangements.

Questions You May Ask

• What capital allowances are available when purchasing company cars and vans?
• Can my business claim 100% tax relief when purchasing an electric vehicle?
• What is the difference between a First-Year Allowance and a Writing Down Allowance?
• Are second-hand electric cars eligible for the same allowances as new vehicles?
• How do capital allowances differ between outright purchase, hire purchase and leasing?
• Can my business claim tax relief on electric vehicle charging equipment?

How Do Capital Allowances Work?

Capital allowances provide tax deductions for qualifying capital expenditure, reducing taxable profits.

The available relief depends on the type of asset and the relevant qualifying conditions.

The principal allowances relevant to company fleets include:

• First-Year Allowances (FYAs): Allow qualifying expenditure to be deducted in the year it is incurred, at the applicable percentage.
• Writing Down Allowances (WDAs): Allow qualifying expenditure to be deducted progressively, normally on a reducing-balance basis.
• Annual Investment Allowance (AIA): Provides 100% relief on qualifying plant and machinery expenditure, subject to the annual limit and eligibility conditions.
• Full Expensing: Allows qualifying companies to deduct 100% of the cost of eligible new and unused main-rate plant and machinery, excluding cars.

The tax relief available should not be confused with a direct government grant. Capital allowances reduce taxable profits and therefore the amount of tax payable, subject to the business's circumstances.

Cars

Capital Allowances for Company Cars

For company cars purchased from April 2021, capital allowances are primarily determined by the vehicle's CO₂ emissions and whether it is new or second-hand.

Company Car Capital Allowance Rates – 2026/27

The 14% main writing-down allowance applies from 1 April 2026 for Corporation Tax purposes and 6 April 2026 for Income Tax purposes.

The special-rate allowance remains at 6%.

Where an accounting period spans a change in writing-down allowance rates, transitional calculations may apply.

Changes Announced in Budget 2026

The government announced a further reduction in the main Writing Down Allowance from 14% to 12%, effective:

• 1 April 2027 for Corporation Tax purposes.
• 6 April 2027 for Income Tax purposes.

The special-rate Writing Down Allowance remains at 6%.

These changes affect the timing of tax relief on qualifying assets, including second-hand electric cars and qualifying low-emission cars.

The announced changes remain subject to the relevant legislation.

New Zero-Emission Cars – 100% First-Year Allowance

Businesses purchasing qualifying new and unused cars with zero CO₂ emissions can claim a 100% First-Year Allowance.

This allows the full qualifying purchase cost to be deducted when calculating taxable profits for the period in which the expenditure qualifies.

For example, a business purchasing a qualifying new electric car for £40,000 may be entitled to deduct £40,000 from its taxable profits.

For a company paying Corporation Tax at 25%, this could represent a £10,000 reduction in its Corporation Tax liability, assuming sufficient taxable profits and no other adjustments.

The allowance provides tax relief rather than a £40,000 cash payment.

Under current legislation, the 100% First-Year Allowance for qualifying zero-emission cars is available until:

The allowance is available only where the relevant qualifying conditions are met.

The government may announce further extensions or amendments, so businesses considering vehicle purchases should check the applicable rules when making investment decisions.

Second-Hand Electric Cars

Second-hand electric cars do not qualify for the 100% First-Year Allowance available to qualifying new and unused zero-emission cars.

Instead, they normally qualify for the main-pool Writing Down Allowance.

For 2026/27, this is 14%, reducing to 12% from April 2027 under the changes announced in Budget 2026.

This means that businesses purchasing second-hand electric cars will generally obtain tax relief over a number of years rather than receiving the full deduction upfront.

Petrol, Diesel and Hybrid Cars

For cars purchased from April 2021, the capital allowance rate depends on their CO₂ emissions.

Cars emitting between 1g/km and 50g/km normally qualify for the main-pool Writing Down Allowance.

Cars emitting more than 50g/km normally qualify for the special-rate Writing Down Allowance of 6%.

These rules generally apply to new and used vehicles.

The 100% First-Year Allowance for new zero-emission cars does not apply to petrol, diesel or hybrid cars with positive CO₂ emissions.

How Writing Down Allowances Work

Writing Down Allowances are normally calculated on the remaining balance of qualifying expenditure within the relevant capital allowance pool.

For example, a business purchasing a second-hand electric car for £30,000 in a qualifying 2026/27 accounting period may obtain the following initial relief:

Further writing-down allowances can be claimed in subsequent periods on the remaining pooled expenditure, using the applicable rate.

The example is simplified and assumes the expenditure is eligible for the stated annual rate and the business has no other relevant pool movements.

Disposal proceeds are normally brought into the capital allowance calculation, subject to the relevant rules. Ordinary pooled expenditure does not generally generate a separate balancing allowance when an individual vehicle is sold, although different rules can apply to single-asset pools and other circumstances.

Company Cars Available for Employee Private Use

A company can generally claim capital allowances on a qualifying car provided to an employee or director, even where the vehicle is also available for private use.

However, private use can create a taxable company car Benefit in Kind for the employee and a Class 1A National Insurance liability for the employer.

Different restrictions may apply where a sole trader or partner uses a vehicle partly for private purposes.

Capital allowances and company car Benefit in Kind taxation should therefore be considered together.

How Does Vehicle Funding Affect Capital Allowances?

The tax treatment of a vehicle depends on the funding agreement and whether the business is treated as acquiring the asset for capital allowance purposes.

The accounting treatment of an arrangement does not necessarily determine its tax treatment.

For hire purchase agreements, the qualifying capital expenditure is generally considered separately from finance charges.

For leased cars, the lessor may claim capital allowances where eligible, although First-Year Allowances are subject to restrictions, including restrictions on cars acquired for leasing.

Businesses should obtain advice on the terms of their particular funding arrangements.

Vehicle Classification

Vehicle classification is important because the tax treatment of a car can differ significantly from that of a van.

A vehicle described commercially as a van or pick-up is not automatically treated as a commercial vehicle for every tax purpose.

Businesses should confirm the relevant classification before assuming that AIA or full expensing is available.

Electric Vehicle Charging Equipment

Businesses purchasing qualifying new and unused electric vehicle charging equipment may be able to claim a 100% First-Year Allowance.

This relief can apply to eligible expenditure on equipment used to provide electric vehicle charging facilities.

Under current legislation, the allowance is available for qualifying expenditure incurred by:

Normal capital allowance alternatives may still be available where expenditure does not qualify for the specific 100% First-Year Allowance.

The tax treatment of associated electrical works and infrastructure should be considered separately, as not every element of an installation necessarily qualifies for the same allowance.

Impact on Your Business Fleet

Capital allowances can materially affect the total cost of acquiring and operating business vehicles.

The amount and timing of tax relief differ between electric cars, combustion-engine cars and commercial vehicles, and can vary according to the funding method selected.

Businesses should consider:

• The availability of 100% First-Year Allowances on qualifying new zero-emission cars.
• The different treatment of new and second-hand electric vehicles.
• The Annual Investment Allowance and full expensing available for qualifying commercial vehicles.
• Changes to Writing Down Allowance rates from April 2026 and April 2027.
• The availability and timing of tax relief on charging infrastructure.
• Differences between ownership-based funding and vehicle leasing.
• The combined impact of capital allowances, Corporation Tax, VAT and Benefit in Kind taxation.

Capital allowances should form part of a comprehensive Whole Life Cost and vehicle funding assessment rather than being considered in isolation.

LetsTalkFleet provides independent fleet consultancy to help businesses compare vehicle funding options, assess electric vehicle investment and understand the financial implications of alternative fleet policies.

Our services include Whole Life Cost modelling, fleet funding comparisons, electric vehicle transition planning and tax-efficient fleet policy reviews.

LetsTalkFleet can provide independent impartial advice on Fleet vehicle Capital Allowances for your business so please get in touch with any specific enquiries you have, we are available on 0330 056 3335 or via email [email protected] .

HMRC – Capital Allowances for Business Cars

HMRC – Annual Investment Allowance

HMRC – 100% First-Year Allowances

HMRC – Budget 2026 Capital Allowance Changes