We recently covered the company tax charges for businesses considering providing company cars to employees and directors. Now let’s take a look at the tax consequences for the companies.
Having a good understanding of what costs are tax deductible for the company is always important, especially for owners of SMEs.
Spoiler alert: There is a huge difference between tax deductions for electric cars compared to conventional petrol engines. This will give readers a further insight why many companies buy electric these days.
A company that buys a car for its business may claim capital allowances on its cost, which results in less corporation tax to pay.
Similar to the company car tax, the key criteria for the level of tax deduction are the CO2 emissions per km. The lower the emissions, the higher the capital allowances (i.e. the greater the tax deduction).
New and unused electric cars with zero CO2 emissions per km qualify for 100% first year allowances. This means the company can buy a £50k car and (provided it has sufficient profits) can offset the entire cost against its profits. For companies, the relief is available until 31 March 2027.
Qualifying expenditure on new and unused electric vehicle charge point equipment can also receive a separate 100% first-year allowance.
Important to note: The 100% allowance brings the tax deduction forward. If the company later sells the car, the sale proceeds must be brought into its capital allowance calculation and there may be a balancing charge.
Second hand electric cars unfortunately do not qualify for the 100% first year allowance. Instead, they are allocated to the “main pool”, which means these cars are written down at 14% per year on a reducing balance each year (as opposed to straight line basis). This main rate applies from 1 April 2026 for corporation tax, as it was 18% prior to that date. Accounting periods spanning that date need a blended rate.
50 is the Magic Number
What about all the other cars? Well, this is where the 50 is the magic number. If the CO2 emissions are at or below 50g/km, then the 14% main rate applies from 1 April 2026. This applies to all cars (petrol/diesel/hybrid).
Cars with CO2 emissions above 50g/km qualify for only a 6% writing-down allowance, making 50g/km the key threshold.
Let’s work with some illustrative numbers, with a £50,000 car, a 12-month accounting period beginning after 1 April 2026, sufficient taxable profits, and an assumed 25% corporation tax rate:
- New Electric car with zero CO2 emissions at nil => 100% FYA at £50,000. This will save the business £12,500 (£50,000 x 25% = £12,500)
- Used Electric car with zero CO2 emissions at zero => 14% WDA at £7,000 in year 1 (£50,000 x 14% = £7,000). The WDA will be lower each year, as it is calculated on reducing balance basis. This will save the business corporation tax of £1,750 (£7,000 x 25% = £1,750) in year one. That’s a huge difference in the amount of tax saved, compared to the new electric car.
- New car (Petrol/diesel/hybrid) with CO2 emissions of up to 50g/km => WDA at £7,000 in year 1 (£50,000 x 14% = £7,000). This will save the business corporation tax of £1,750 (£7,000 x 25% = £1,750) in year
- New car (Petrol/diesel/hybrid) with CO2 emissions over 50g/km => WDA at £3,000 in year 1 (£50,000 x 6% = £3,000). This will save the business corporation tax of £750 (£3,000 x 25% = £750) in the year one.
If the company provides the car to a director or employee and there is private use, the company can still claim capital allowances on the full cost. The private use is dealt with separately through the company-car benefit rules; you do not restrict the company’s capital allowances for the director’s private use.
What about Leasing?
Under an ordinary car lease, the company normally deducts qualifying rentals rather than claiming capital allowances. Hire purchase and qualifying long funding leases can be treated differently:
- Leased fully electric cars with zero CO2 emissions per/km => 100% of the qualifying rentals are deductible.
- Leased cars with up to 50g CO2 emissions per/km => 100% of the qualifying rentals are deductible.
- Leased cars with over 50g CO2 emissions per/km => 85% of the qualifying rentals are deductible. This means there is a 15% rental restriction on lease rentals with CO2 above 50g per km.
Who claims the capital allowances on leased cars? Under an ordinary lease, the leasing company generally claims any available capital allowances. Different rules can apply to qualifying long funding leases.
For further information, here are some useful links:
Capital Allowances and Balancing Charges
Capital Allowances for business cars
Business Income Manual – BIM 47725
At SAS, we help business owners with their company cars and many other tax issues
Get in touch to discuss your questions.
Author notes
Written by Sean Hackemann, Director of Specialist Accounting Solutions. Team SAS provides virtual finance teams support, company accounts & tax and advisory services.
Disclaimer: This article is intended to provide a quick reference to the current tax regulations for drivers of company cars and employers. The content has been provided for informational purposes only, does not constitute tax advice and should not be relied on to cover specific situations or circumstances or as a substitute for professional advice.
