Capital allowances on cars

The latest reductions to the capital allowances CO2 emissions limits mean a significant number of cars now only qualify for the lowest amount of relief.

From 1 April (6 April for unincorporated businesses):

  • Only new fully electric cars with zero CO2 emissions now qualify for the 100% first-year allowance. Previously, the CO2 emissions limit was 50 g/km.
  • The CO2 emissions limit to qualify for writing-down allowances at the rate of 18% has been reduced from 110 g/km to 50 g/km.

Writing-down allowances are therefore available at the rate of 18% where a car’s CO2 emissions are between 1 and 50 g/km, and for second-hand electric cars. The lower rate of 6% is applied where CO2 emissions are over 50 g/km.

There is a further incentive for those looking to switch to electric cars: the 100% first-year allowance is now available until April 2025.

Leasing

Leasing costs are deductible against profits regardless of a car’s CO2 emissions, so leasing will now be more attractive than ever, especially where cars with higher CO2 emissions are concerned. However, only 85% of leasing costs are deductible if CO2 emissions exceed 50 g/km; this threshold has also been lowered in line with the capital allowances limit.

Planning

For company owners, there are some very attractive tax advantages to choosing an electric company car:

  • The 100% first-year allowance means that the full cost can be written off against profits in the year of purchase, saving corporation tax at 19% (or income tax at rates up to 45% for unincorporated businesses).
  • The car benefit percentage is just 1% in 2021/22 and will then be 2% for the next three years. These low rates create minimal income tax implications, with only a small amount of class 1A NICs due.

Despite their higher purchase price, the extra cost of electric cars can be offset by the tax savings.