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Maximising tax relief when buying a new car

We are often asked whether a new car should be purchased outright or leased.  The tax relief available on cars purchased after 6th April 2009 has changed and is now dependent on the CO2 emissions.

Outright Purchase

If you purchase a car, you are able to claim a writing down allowance (WDA) on the cost of the car each year that it is used in your business.  If you lease a car which gives you an option to buy it at the end of the term, for tax purposes, the car is treated as if it belongs to you although, legally, it is still owned by the finance company until all of the payments are made. 

The rate of the allowance on the cost of a car purchased after April 2009 is calculated according to the car’s CO2 emissions which are as follows:

Environmentally Friendly Car

If you purchase a car which emits no more than 110g/km of CO2 emissions and you are the first registered owner, you can claim 100% capital allowances restricted to the business use of the car regardless of cost.  If you are not the first registered owner, you will only be able to claim 20% capital allowances, restricted to the business use.

There will then be no further allowances available while you continue to use it in your business.  When you sell the car, you will have to pay tax back on the business portion of the money received.

Cars emitting CO2 between 111g/km and 159g/km

For cars that emit between 111g and 159g of CO2 emissions, you can claim 20% capital allowances of the cost per annum on a reducing balance basis restricted to business use.

Cars emitting CO2 of 160g/km

For cars that emit more than 160g of CO2 emissions, the amount you can claim reduces to 10% per annum on a reducing balance basis restricted to business use.

The previous restriction of £3,000 per annum has been abolished for all cars purchased after April 2009.

The tax value of your car reduces each year by the allowance claimed.  When you sell the car, you will receive tax relief on the difference between the tax value and the sale proceeds.  If the sale proceeds are higher, then you would have tax to pay on the difference restricted to business use.  In the example below, if the car was sold in year 3 for £15,000, then you would be able to claim the business use of the difference, i.e. £3,560.

You can also claim tax relief on the loan or HP interest restricted to business use.

Transitional Rules until 6th April 2014

The above changes relate to cars purchased after 6th April 2009.  For cars acquired before this date, the old rules will continue to apply.  This means that, for cars costing £12,000 or less, the WDA will be 20% and for cars over £12,000, the £3,000 restriction will apply.

Leasing

If you lease a car which has no option for you to purchase, this is effectively a rental agreement between you and the leasing company.  If the CO2 emissions are below 160g, you would be able to claim the business use of the monthly payments.  If the car emits more than 160g, the monthly payments are restricted to 85%.

Example

If you purchased a car which emits 150g CO2 emissions for £29,000 and you claim 50% business use, the capital allowances would be as follows:

Jenny Stone