Future capital allowances from April 2018
The government will extend the 100% First Year Allowance (FYA) for businesses purchasing low emission cars for a further three years to April 2021. It will also change the qualifying criteria to the following:
- up to 50 g/km – 100% first year allowance
- 51g/km-110g/km – 18% capital allowances
- 111g/km or more – 8% capital allowances
CAPITAL allowances can be deducted from you company’s tax bill – or individual’s bill if self-employed – for certain purchases made for business. This includes company cars (filed under plant and machinery).
From 01 April 2010 for companies, and from 06 April for the self-employed and partnerships, the capital allowances (or writing down allowances) were changed to favour tax breaks based on CO2 emissions. This brought capital allowances in line with CO2 based company car tax.
The changes replaced the previous expensive car leasing allowance scheme.
The capital allowances are designed to promote the take up of low emission cars: the lower the rate of CO2 emissions, the quicker the tax relief, and the emission brackets have been gradually lowered.
There original three tax breaks available were:
- Up to 110g/km – a 100% first year allowance applicable until 31 March 2013.
- 111g/km to 160g/km -20% per annum on a reducing basis. There is no balancing charge applicable on sale of the vehicle.
- Over 160g/km – 10% per annum on a reducing basis; no balancing charge applicable on sale of the vehicle.
Cars go into the main plant and machinery capital allowance ‘pool’, rather than being accounted for as individual assets. Therefore the purchase prices of all company cars and most other plant and machinery are accounted for together, with a standard 20% writing down allowance being calculated on the total balance that is in the pool at the year-end.
Company cars emitting over 160g/km go into a separate pool with a reduced writing down allowance.
Rate change for capital allowances from 2012
Conservative Chancellor, George Osborne, announced new rates in the Emergency Budget (22 June 2010). From April 2012, the allowances were reduced from 20% to 18% for the main rate; and from 10% to 8% for emissions above 160g/km.
New rates for capital allowances from 2015-18
The rates for company cars were changed again to further increase take up of lower CO2 emission cars. As before there are three levels for company purchased cars applicable from 01 April 2015 for companies, and from 06 April 2015 for self-employed and partnerships:
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- up to 75g/km – 100% first year allowance. Claimable until the end of March 2018
- 76g/km-130g/km – 18% capital allowances
- 131g/km or more – 8% capital allowances.
For sole traders or partnerships, the allowances are treated slightly differently, with a percentage of the private use deducted before capital allowances are applied.
2016 March Budget brings future changes
The Chancellor announced that the 100% First Year Allowance (FYA) for businesses purchasing low emission cars will be extended for a further three years to April 2021. The 100% FYA had been due to end on March 31, 2018.
The main rate threshold for capital allowances for business company cars, currently set at 130 g/km, will be reduced to 110 g/km of CO2 and the FYA threshold to 50 g/km from April 2018, to reflect falling vehicle emissions.
The Chancellor is giving companies a two-year window to react to the changes, which means that, thresholds for capital allowances on cars bought outright will be:
- Vehicles up to 50g/km (reduced from 75g/km): Companies can write down the full cost against their taxable profits
- Vehicles emitting 51-110g/km: Companies can write down 18% of the cost of the car against their taxable profits each year, on a reducing balance basis
- Vehicle above 110g/km: Companies can write down 8% of the cost of the car against their taxable profits each year, on a reducing balance basis
It will also follow that car leasing companies, which are ineligible to claim 100% first-year writing down allowances on cars, will be restricted to 18% (0-110 g/km) and 8% (from 111 g/km) on a reducing balance basis.
The government will further review the case for the FYA and the appropriate business cars emission thresholds from 2021 at Budget 2019.
It’s wise to check with a qualified financial adviser or accountant before taking an decisions based on allowances for purchasing new business or company cars.