Let’s Break This Down Together...
Capital allowances on hybrid cars can feel confusing. The rules depend on emissions, purchase dates, and how you use the car.
In this guide, we’ll walk through the different allowance types, explain how to calculate your claim, and flag common mistakes to avoid. You’ll also get tips on business versus personal use and key rule changes to watch.
By the end, you’ll know how to cut your tax bill and make the most of greener choices. Let’s dive in.
What Are Capital Allowances for Hybrid Cars?
When your business buys a hybrid car, HMRC doesn’t let you deduct the full purchase price as a business expense immediately. Instead, you claim capital allowances, which spread the tax relief over several years. Companies, as well as sole traders and partnerships, can claim capital allowances on business vehicles.
Hybrid cars with lower CO₂ emissions qualify for more generous allowances than standard petrol or diesel vehicles. Only eligible vehicles those meeting specific CO₂ emission criteria can benefit from these allowances. This means faster tax relief and better cash flow for your business.
Think of capital allowances as HMRC’s way of saying “thanks for choosing a greener option”. The lower your emissions, the bigger your tax break. Capital allowances can only be claimed on vehicles purchased for business use, and the car must be treated as a business asset.
Types of Capital Allowances
When your business invests in a new car whether it’s a hybrid, electric car, or another vehicle understanding the different types of capital allowances can help you maximise your tax relief and reduce your taxable profits.
Here’s a quick guide to the main types of capital allowances you might encounter:
- Annual Investment Allowance (AIA): This allowance lets businesses deduct the full cost of most qualifying assets from their profits in the year of purchase. However, it’s important to note that cars, including electric cars and hybrids, are generally excluded from AIA claims. Other vehicles and equipment may qualify, so check if your purchase fits the criteria.
- Enhanced Capital Allowances: If your business buys a new and unused electric car with zero CO2 emissions, you can claim a 100% first year allowance. This means you can deduct the full cost of the electric car from your taxable profits in the year you buy it an excellent incentive for going green.
- Writing Down Allowances: For most business cars, including hybrids, you’ll claim a percentage of the car’s value each year as a deduction from your profits. The rate depends on the car’s CO2 emissions. Lower emission cars qualify for a higher rate, helping you claim more tax relief sooner.
- Main Rate Allowances: Cars with CO2 emissions of 50g/km or less qualify for the main rate allowance, which is 18% per year on a reducing balance basis. This means you can deduct 18% of the car’s remaining value from your profits each year, making it a solid option for low-emission vehicles.
- Special Rate Allowances: If your car’s emissions are above 50g/km, it falls into the special rate pool, where you can only claim 6% per year. While the tax relief is slower, it still helps reduce your taxable profits over time.
To calculate capital allowances, you’ll need to know your car’s CO2 emissions, the date of purchase, and whether the car qualifies for the main rate, special rate, or the 100% first year allowance. The claim depends on these factors, so always check the latest HMRC guidance to ensure your vehicle qualifies for the best possible deduction.
By understanding these different types of capital allowances, businesses can make smarter decisions when purchasing cars and other vehicles, ensuring they claim every deduction they’re entitled to and keep their tax bills as low as possible.
Business vs Personal Use Considerations
Most business owners use their cars for both business and personal trips. This means you’ll need to track your mileage to work out the split. Company cars provided to employees are subject to different tax rules than cars owned personally.
HMRC expects you to keep good records, so using a mileage app is a smart move. The business percentage of your mileage determines what proportion of your capital allowances you can claim.
There’s also Benefit in Kind (BiK) tax to consider if your company owns the car and you use it personally. If an employee receives a company car as a benefit, they will need to pay income tax on the value of the benefit in kind. Only the business can claim capital allowances on company cars; employees cannot claim these allowances themselves. The good news is that hybrid cars typically have lower BiK rates than pure petrol or diesel vehicles.
If you’re self-employed, the rules differ slightly. You’ll claim capital allowances on the business percentage of your car’s value. Employees, however, cannot claim capital allowances on cars provided by their employer.
Recent Changes to Know About
The government keeps tweaking the capital allowance rules to encourage greener choices. In April 2021, they lowered the emission thresholds, making it harder for higher-emission hybrids to qualify for the main pool rate.
Looking ahead, the 100% first-year allowance for zero-emission cars is currently set to run until April 2025. If you’re thinking about an electric vehicle, sooner might be better than later! The timing of when a car is purchased can affect eligibility for corporation tax relief, so planning your vehicle purchases is important for maximising tax benefits.
I recently helped a client who switched from a petrol SUV to a low-emission hybrid. His tax bill dropped by nearly £2,000 in the first year alone. These tax savings apply to cars bought for business use, and the amount can depend on when the vehicle was purchased.
The super-deduction scheme doesn’t apply to cars, sadly, but it’s worth knowing about for other business assets you might purchase. This scheme can provide significant corporation tax relief on qualifying purchases.
Always check the latest HMRC guidance before making big decisions. The thresholds can change with each Budget announcement.
Common Mistakes to Avoid
Many business owners accidentally put their hybrid car in the wrong pool because they use the wrong emission figure. Always use the figure from the V5C, not what the manufacturer advertised. Make sure your car is eligible for the allowance you are claiming.
Another common slip-up is forgetting to adjust for private use. HMRC takes a dim view of this, so always be honest about your usage split. Don’t mix up your pools when doing calculations. Keep main pool and special rate pool assets separate in your records. Only cars that meet the eligibility criteria can be claimed for the relevant allowance.
And finally, keep all your paperwork! If HMRC comes knocking, you’ll need to show your workings and prove your emission figures.
Leased cars are subject to different rules for capital allowances. Eligibility to claim depends on whether the car is leased or owned outright, and on the lease period. Generally, capital allowances can only be claimed if the business owns the car, not if it is leased. Always check the terms of your lease and whether ownership transfers at the end of the lease period to determine if you are eligible to claim allowances.
Final Thoughts
Capital allowances for hybrid cars can significantly reduce your tax bill, especially if you choose a model with lower emissions.
The system rewards greener choices, so it's worth considering the tax implications before deciding which hybrid to buy.
While the rules might seem fiddly, the potential tax savings make it worth getting to grips with them.
If in doubt, chat with your accountant – or better yet, use a tax app that can do the heavy lifting for you.
