Capital allowances for cars | Severn Accounting

Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead. Understanding which approach suits your circumstances can make a meaningful difference to your tax position, so it’s worth taking time to explore both options.

How capital allowances work for cars

Capital allowances are a form of tax relief that allows you to deduct the cost of business assets from your taxable profits. For most business assets, you can claim capital allowances through the Annual Investment Allowance (AIA) or the general pool of plant and machinery.

However, cars are treated differently under HMRC rules. The key distinction is that only the business proportion of a car’s cost qualifies for capital allowances. If you use a car partly for personal journeys, you’ll need to apportion the cost accordingly. This requires honest record-keeping and a clear business justification.

The allowance available depends on the car’s CO2 emissions. Main rate allowance applies to cars with CO2 emissions exceeding 50g/km, currently at 18% per annum on a reducing balance. For zero-emission cars, a 100% first-year allowance is available, meaning you can claim the entire cost in the year of purchase. This government incentive makes electric vehicles particularly attractive from a tax perspective.

The simplified expenses alternative

If you’re a sole trader or partner, the simplified expenses system (also known as the fixed rate deduction method) offers an attractive alternative to tracking capital allowances. Rather than claiming capital allowances, you simply claim a fixed rate per business mile driven.

For the 2024/25 tax year, the rate stands at 45 pence per mile for the first 10,000 miles, and 25 pence per mile thereafter. This approach eliminates the need to calculate the business proportion of your car’s purchase price or keep detailed records of depreciation. You simply multiply your business mileage by the appropriate rate and claim the result as an expense.

The simplified system works particularly well if your business mileage is relatively modest or if your car’s business use is straightforward. Importantly, you cannot claim capital allowances and the simplified expenses system in the same tax year—you must choose one approach.

Comparing the two approaches

Deciding between capital allowances and simplified expenses requires a bit of calculation. Start by estimating your annual business mileage and apply the simplified expense rates. Then calculate what capital allowances would deliver based on the car’s cost and CO2 emissions rating.

For newer, expensive vehicles with high business mileage, capital allowances often provide better value. For older cars or lower mileage, simplified expenses frequently win. The tipping point varies, but as a rough guide, if your annual business mileage exceeds 12,000 miles and your car cost more than £15,000, capital allowances may be worthwhile.

Don’t overlook the administrative burden. Simplified expenses requires only a mileage record and basic documentation. Capital allowances demand that you track depreciation, maintain records of the car’s original cost, and calculate the business proportion annually. If detailed record-keeping isn’t your strength, simplified expenses may be the pragmatic choice.

Limited companies and company cars

If you operate as a limited company, the rules differ. Companies cannot use the simplified expenses system—they must claim capital allowances if they own vehicles. However, many companies provide company cars to employees as a benefit, which creates additional tax considerations including benefit-in-kind calculations. This is a more complex area and worth discussing with your accountant.

Taking the right approach

There’s no universal right answer—it genuinely depends on your circumstances. Variables include your car’s cost and emissions, your annual business mileage, whether you’re a sole trader or company, and your preference regarding administrative complexity.

The best approach is to calculate both scenarios for your situation and compare the outcomes. Keep in mind that your circumstances may change year to year, and you’re not permanently locked into one method—though switching between approaches does require careful timing to avoid HMRC challenges.

For tailored advice, contact Severn Accounting—we’re here to help.