As the UK government continues its commitment to reducing carbon emissions, businesses and self-employed individuals have a fantastic opportunity to contribute to a greener future while benefiting from tax incentives.
One of the most attractive incentives available is the capital allowances for electric cars.
This explores how capital allowances work for businesses and self-employed individuals and how you can maximise your tax savings by investing in electric vehicles (EVs).
Whether you’re a business owner looking to upgrade your fleet or a self-employed professional considering a new car, it’s time to take full advantage of these generous tax benefits.
Understanding Capital Allowances for Businesses and Self-Employed Individuals
Capital allowances allow businesses and self-employed individuals to gain tax relief on certain types of expenditures.
It covers the purchase of assets that will be used for business purposes over an extended period, typically including machinery, equipment, and vehicles.
Capital allowances applies to both businesses and self-employed individuals:
- For businesses, capital allowances are claimed against their taxable profits.
- For self-employed individuals, capital allowances are used to reduce their taxable income.
In both cases, the principle remains the same: the allowances provide a means to write off the cost of a business asset against tax over time.
Capital Allowances for Electric Cars
The rules for claiming capital allowances on cars can be complex, with factors such as CO2 emissions and the date of purchase dictating the allowances available.
Tax breaks and benefits for electric cars are much more straightforward and generous:
100% First Year Allowances (FYAs)
The main benefit of purchasing a new electric car for your business is the ability to claim a 100% first-year allowance (FYA).
This means you can deduct the full cost of the car from your taxable profits (for businesses) or income (for self-employed individuals) in the year of purchase.
Example For Businesses
A business purchases a new electric car for £50,000.
Since electric cars with zero emissions qualify for 100% First-Year Allowance (FYA), the business can deduct the full £50,000 from its taxable profits in the year of purchase.
At the current corporation tax rate of 25% (for profits over £250,000), this would result in a tax saving of £12,500 in the first year.
Example For Self-Employed Individuals
If a self-employed individual purchases a new electric car for £50,000 and uses it 100% for business, they can also claim 100% FYA, allowing them to deduct the full £50,000 from their taxable income.
If their tax rate is 40%, this would result in a tax saving of £20,000 in the first year.
These figures assume full business use; if there is personal use, the deduction would need to be adjusted accordingly.
Writing Down Allowances (WDAs)
If a car doesn’t qualify for FYAs (for instance, if it’s a used electric car), it will fall into the main rate pool for capital allowances.
Cars in this pool are eligible for writing down allowances (WDAs) at a rate of 18% per year on a reducing balance basis.
For example:
- A business buys a used electric car for £30,000.
- In the first year, they can claim 18% of £30,000 as a writing down allowance, which is £5,400.
- In the second year, the remaining balance is £24,600 (£30,000 – £5,400). The allowance for this year is 18% of £24,600, which is £4,428.
- This process continues until the car’s value has been fully written off against tax.
Understanding Personal Use
If an electric car is used for personal journeys as well as business, the capital allowances must be proportionately reduced. Personal use includes commuting to and from work.
For instance:
- A sole trader buys an electric car for £40,000 and uses it 75% for business and 25% for personal use.
- They can claim 100% FYAs on the business proportion: £40,000 x 75% = £30,000.
- If they’re a higher rate taxpayer (40%), this would yield a first-year tax saving of £12,000 (40% of £30,000).
Leasing vs Purchasing
If you lease an electric car rather than purchasing it, the tax treatment is different:
- No Capital Allowances: When you lease a car, you do not own the asset, meaning you cannot claim capital allowances like First-Year Allowances (FYA) or Writing Down Allowances (WDA) that are available when purchasing. Instead, the cost of the lease can be deducted as a business expense.
- Deducting Lease Payments: Lease payments can be fully deductible as business expenses, reducing your taxable profits. You can claim relief for each payment in the accounting period in which it was incurred. This makes leasing an appealing option for businesses that prefer spreading costs evenly over time rather than facing larger outlays.
- Adjustment for Personal Use: If the leased vehicle is used for both personal and business purposes, the deductible portion is limited to the proportion of business use. For example, if the car is used 60% for business and 40% for personal travel, only 60% of the lease payments are deductible.
How Double Point Can Help
Capital allowances can be complex but can hugely reduce your tax bill. If you need help, look no further than Double Point.
Our team of chartered accountants has extensive experience in helping businesses and self-employed individuals maximise their tax efficiency.
We can provide detailed guidance on capital allowances for electric cars, ensuring you claim all the reliefs you’re entitled to.
We can also advise on the broader financial implications of adopting EVs, such as budgeting, cash flow planning, and deciding whether to lease or buy.
Ready to make the switch to electric? Get in touch with us today to unlock tax savings with your purchase.
