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I am looking to buy a new car, are there any tax benefits in buying a car with a low emission? - part 1 of 1

Published 01/04/2007

When a new car is purchased the claim for tax allowance is dealt with by what is known as the 'capital allowance' computation. Using this method only 25% of the purchase price of the car is claimed in the year of purchase, with the remaining allowance claimed over the time you own that particular vehicle on a reducing basis.

For example if a new vehicle was purchased for £10,000 then the allowances used for tax purposes would be £2,500 (assuming there is no private use of the car) which equates to a reduction in your tax bill of £750 (assuming basic rate tax and class 4 national insurance are due to be paid).

Under recent changes in legislation it may be possible to claim the whole purchase cost of the car as a tax deduction in the year of purchase. To qualify for this the following conditions must be met

1. It must be a new car, not second hand.
2. The carbon dioxide (CO2) emissions must not exceed 120gm per kilometre, or
3. Is an electric car.

Using the example, and assumptions as above then on a new purchase of £10,000 the whole amount could be claimed as a 'capital allowance' meaning that a reduction in your tax bill of £3000 could be possible.

However, using the more traditional method tax relief is spread over a number of years as opposed to being used up in year 1. If the 100% capital allowances are claimed in year 1 then it is likely that your tax bill for year 2 and 3 will be higher than that using the 25% method. Dependent upon your profits a 100% claim may also mean that you make a trading loss. This sounds good but it does mean you could loose the benefit of the personal allowance that all individuals are entitled to. Not a good idea if it can be avoided.

Using the 100% allowance in year 1 also guarantees that when the car is sold you make a 'profit' which will effect the allowance available on the new car.

My answer to the question must therefore be - perhaps. I would advise that when you next change your car, find out the emission levels and advise your accountant and let them advise you on the best option for your particular circumstances.

Have you got a topic or general tax question you want us to cover in the Q & A next issue ? Then email mikep@taxdog.com

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1st Published 01/04/2007
last update 09/12/2022 14:56:10

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