Capital allowances on electric cars: the 100% first-year allowance and the 2026 rules for company cars

A new, unused electric car bought by a UK business qualifies for a 100% first-year allowance (FYA): the whole purchase price is deducted from taxable profits in the year of purchase, for expenditure incurred up to 31 March 2027 (Corporation Tax) or 5 April 2027 (Income Tax). A petrol or diesel car above 50 g/km of CO2 gets only 6% a year, and since April 2026 the main pool for used EVs and other low-emission cars has dropped from 18% to 14%.

This guide covers the rules car by car (new EV, used EV, plug-in hybrid, petrol), why cars are shut out of the annual investment allowance and full expensing, what happens when you sell, how leasing compares, the VAT traps, and two worked examples in pounds for a limited company. Voltaback does not sell or finance cars; once the car is on the fleet, the cost that remains is energy, and that is where real-cost charging reimbursement comes in.

How do capital allowances work on company cars?

Capital allowances are the tax version of depreciation. Accounting depreciation in your profit and loss account is added back in the tax computation, and capital allowances are deducted instead, at rates set by law.

Cars are treated differently from almost every other piece of plant and machinery:

• they are excluded from the annual investment allowance (AIA, up to £1 million a year);
• they are excluded from full expensing, the 50% FYA and the new 40% FYA available since 1 January 2026;
• their treatment depends almost entirely on their CO2 emissions and on whether they are new or second hand.

Source: HMRC Capital Allowances Manual CA23153, GOV.UK, 40% first-year allowance.

What counts as a "car"?

For capital allowances, a car is a mechanically propelled road vehicle other than a motorcycle, a vehicle of a type primarily suited to carrying goods (such as most vans), or a vehicle not commonly used as a private vehicle. This distinction matters: vans are not cars, so they can benefit from the AIA or full expensing, whatever their emissions.

Capital allowance rates for cars bought from April 2021

The main rate changed from 18% to 14% on 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. If your accounting period straddles the date, you calculate a hybrid rate for that period.

Example: the hybrid rate for a calendar-year company

A company with an accounting period from 1 January to 31 December 2026 has 90 days at 18% (1 January to 31 March) and 275 days at 14%. Its main pool rate for the period is:

• 18% x 90/365 = 4.44%
• 14% x 275/365 = 10.55%
• hybrid rate: about 14.99%

On a main pool of £100,000, that is £14,990 of writing-down allowance instead of £18,000 under the old rate: about £750 less tax relief in the year at 25%. The cut does not touch the 100% FYA on new EVs, but it slows relief on used EVs and plug-in hybrids.

Older cars follow the thresholds of their purchase date (for example 110 g/km for main rate between April 2018 and April 2021). Pools carry the balance forward, so a mixed fleet often has cars from several regimes in the same pool.

Sources: GOV.UK, Business cars, GOV.UK, Rates and pools.

The 100% first-year allowance on electric cars

Conditions

HMRC's manual sets four conditions for the 100% FYA:

1. the car is unused and not second hand, first registered on or after 17 April 2002;
2. it is electric, or has zero CO2 emissions (the limit has been 0 g/km since 1 April 2021);
3. the expenditure is incurred by 31 March 2027 (Corporation Tax) or 5 April 2027 (Income Tax);
4. it is not caught by the general FYA exclusions, such as cars bought to lease out.

A plug-in hybrid does not qualify, however long its electric range, because its engine emits CO2. The extension to 2027 was announced in a policy paper of 26 November 2025.

Pre-registered and demonstrator cars

A car that has been driven a limited number of miles for testing, delivery, test drives or as a demonstrator is still treated as unused and not second hand. A car pre-registered to a dealer can also still qualify. That makes nearly-new EVs from dealer stock a legitimate route to the 100% FYA, provided the car was not previously owned and used by someone else.

Timing: when is expenditure "incurred"?

Expenditure is generally incurred when the obligation to pay becomes unconditional, usually on delivery. A car ordered in February 2027 and delivered in May 2027 would miss the current deadline for a company with a 31 March cut-off, unless the FYA is extended again. If you plan a fleet renewal in early 2027, align delivery dates with the deadline.

Sources: HMRC CA23153, GOV.UK policy paper, First-year allowances for zero-emission cars and electric vehicle chargepoints.

Do you have to claim the full 100%?

No. You can claim less than the full FYA and put the balance into the main pool for writing-down allowances. That can make sense for a company with losses, or with profits in the small profits band in one year and the main rate the next, though the timing benefit usually favours claiming in full.

Worked example 1: a £45,000 car, electric versus petrol

A limited company with profits above £250,000 pays Corporation Tax at 25%. It buys a company car for £45,000 (VAT not recoverable, see below) in 2026/27. Compare a new electric car with a new petrol car at 120 g/km.

After four years, the electric car has produced £8,783 more tax relief than the petrol car, and all of it in year one. The petrol car still has £35,133 of unrelieved cost in the special rate pool, relieved at 6% a year on a reducing balance.

For a company paying the 19% small profits rate, the year-one saving on the EV is £8,550; with profits between £50,000 and £250,000, marginal relief makes the effective rate on the slice higher than 25%.

Source: GOV.UK, Corporation Tax rates.

What a used EV changes

The same £45,000 spent on a second-hand electric car goes to the main pool at 14%: £6,300 of allowance in year one, £1,575 of tax saved. Still better than the petrol car, but £9,675 less than a new EV in year one.

Plug-in hybrids: main pool, not 100%

A plug-in hybrid at 1 to 50 g/km goes to the main pool at 14%. A PHEV over 50 g/km, which is rare on recent models but common on older ones, goes to the special rate pool at 6%.

For a £45,000 PHEV at 30 g/km bought by our 25% company:

• year 1: £6,300 allowance, £1,575 tax saved;
• year 2: £5,418 allowance, £1,355 tax saved;
• after four years, about £20,400 of the £45,000 has been relieved (about £5,100 of tax), against the full £45,000 in year one for an EV.

Combined with a much higher benefit-in-kind percentage for the driver, the capital allowance gap is one more reason PHEVs have lost ground in UK company car policies. The driver side is explained in our article on electric car BIK rates.

Who can claim: companies, directors and sole traders

Limited companies

A company claims capital allowances on the full cost of cars it provides to employees or directors, even if they use them privately. The private use is taxed on the employee through the benefit-in-kind regime, not by restricting the company's allowance.

That is why buying an EV through a limited company is so efficient for owner-managers: 100% FYA for the company, and a low BIK for the director.

Sole traders and partnerships

A sole trader or partner who uses the car privately must put it in a single asset pool and restrict the allowance to the business-use percentage. The rate still depends on CO2: 100% FYA for a new EV, 14% or 6% otherwise, multiplied by the business share.

Example: a sole trader buys a new £40,000 EV used 70% for business. FYA: £40,000 x 70% = £28,000 deductible.

Sole traders using the cash basis can only claim capital allowances on cars, not other equipment, which makes the car rules relevant to small businesses too.

Source: GOV.UK, Business cars, HMRC CA23535.

Selling the car: balancing charges and allowances

The 100% FYA is not a gift: it is an acceleration. When the car is sold, the sale proceeds come back into the tax computation.

For a company (cars in the main or special rate pool)

• The disposal value (usually the sale price, capped at the original cost) is deducted from the pool the car belongs to.
• If the pool still has a positive balance, writing-down allowances continue on what is left.
• If the disposal value is larger than the pool balance, the difference is added to profits: a balancing charge.
• A balancing allowance in the main or special rate pool is only possible when the business ceases.

What it means for an EV that had the 100% FYA

An EV that received the full FYA has no cost left in any pool. Its sale price is deducted from the main pool. If the main pool is small (common in a fleet of new EVs), the sale proceeds become a balancing charge, taxed at the company's rate.

Worked example 2: our £45,000 EV is sold after four years for £18,000, and the company's main pool balance is nil.

£6,750 is exactly 25% of the true economic cost (£45,000 - £18,000 = £27,000). The FYA does not increase the total relief; it brings it forward by years, which matters for cash flow.

Single asset pools

For a sole trader's car in a single asset pool, any unrelieved balance at disposal gives a balancing allowance, and any excess a balancing charge, both restricted to the business-use share.

Source: GOV.UK, Capital allowances when you sell an asset.

Buying versus leasing: the tax comparison

Most UK company cars are leased rather than bought. The tax mechanics are different.

Lease rentals

Contract hire rentals are a revenue expense, deducted as they are paid. For cars with CO2 emissions above 50 g/km, 15% of the rental is disallowed for hire periods from 1 April 2021 (Corporation Tax) or 6 April 2021 (Income Tax). Electric cars and plug-in hybrids at 50 g/km or less are not restricted.

VAT on leases

A VAT-registered business leasing a car that is available for private use can normally recover only 50% of the VAT on the rental. The other 50% is blocked to reflect private use. VAT on a separately invoiced maintenance charge can be recovered in full, subject to the normal rules.

Side-by-side

Neither is always better. Buying gives the fastest relief while the FYA lasts; leasing removes residual value risk on EVs, whose second-hand prices have been volatile. The full comparison, including salary sacrifice, is in our guide to leasing electric company cars.

Sources: HMRC BIM47714, GOV.UK, VAT on motoring expenses (Notice 700/64).

VAT: the car, the lease and the electricity

Buying the car

VAT on the purchase of a car is generally not recoverable if the car is available for private use. Recovery is only possible if the car is used exclusively for business and not available for anyone's private use, which HMRC reads strictly (pool cars kept at the office overnight, for example). The capital allowance is then computed on the VAT-inclusive price.

Charging electricity

The VAT treatment depends on who receives the supply:

• charging at work or at a public charger: the business can recover VAT on the business use, with mileage records to split business and private use;
• charging at the employee's home: the supply of electricity is made to the employee, not the employer, so the employer cannot recover VAT, even if it reimburses the cost;
• sole traders and partners can recover VAT on business charging at home, using mileage records.

Source: GOV.UK, VAT Notice 700/64, section 8.

Electric vans: a different, often better, route

Vans are not cars for capital allowance purposes, so the car rules above do not apply to them.

The dedicated 100% FYA for zero-emission goods vehicles applied to purchases before April 2025. Since then, an electric van is treated like other plant and machinery:

• the annual investment allowance gives 100% relief on up to £1 million of qualifying spending a year, for companies and unincorporated businesses;
• full expensing gives companies 100% relief on new and unused main-rate plant, with no upper limit;
• the 40% FYA covers new and unused main-rate assets other than cars bought from 1 January 2026.

In practice, most businesses still get 100% relief in year one on a new electric van, through the AIA or full expensing. The difference with cars is that this relief does not depend on the van being electric: a diesel van qualifies too.

Source: GOV.UK, 100% first-year allowances, GOV.UK, Claim capital allowances.

Accounting depreciation versus capital allowances

The two run in parallel and rarely match.

In the accounts, a company depreciates a car over its expected useful life to the business, down to an estimated residual value. A four-year straight-line policy is common for company cars, matching typical replacement cycles. Depreciation is a judgement made by the business and its auditors.

In the tax computation, depreciation is added back and replaced by capital allowances at the statutory rates. For a new EV, that means the whole cost is relieved in year one for tax, while the accounts spread it over four years.

The gap creates a timing difference. Companies that prepare full accounts under FRS 102 recognise a deferred tax liability for it: tax has been saved now and will effectively be paid back when the car is sold, through the balancing charge. Owner-managers reading their management accounts should not mistake the low tax bill in year one for a permanent saving.

Over how many years should an EV be depreciated?

There is no tax rule on this, because depreciation is not deductible. The useful life in the accounts should reflect how long the business really keeps the car. For EVs, residual values have moved more than for petrol cars in recent years, so many finance teams review the residual value assumption each year rather than fixing it at purchase.

Chargepoints: a separate 100% FYA

New and unused electric vehicle chargepoint equipment has its own 100% FYA, to the same dates: 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax. It covers chargers on your own premises and chargers the company owns at a driver's home.

If a government grant such as the Workplace Charging Scheme pays part of the cost, the FYA only applies to the part you pay. The grants still open and how they combine with the allowance are in our guide to the Workplace Charging Scheme.

Source: GOV.UK, 100% first-year allowances.

What capital allowances really change in the TCO

Capital allowances are a timing advantage on the purchase price. They do not change the running costs, which over four years often equal or exceed the depreciation of the car.

For an electric company car, the running costs that remain are:

• energy: mostly home charging, at the driver's tariff;
• insurance, tyres, servicing: often lower than petrol for servicing, sometimes higher for tyres and insurance;
• Vehicle Excise Duty: electric cars have paid VED since April 2025, including the expensive car supplement for list prices above the threshold;
• the driver's benefit in kind and the employer's Class 1A NIC.

The energy line is where policy choices matter most. An employer can reimburse home charging for a company car tax-free, business and private miles included, under section 239 ITEPA 2003. Reimbursing at HMRC's Advisory Electricity Rate (7p per mile at home since 1 September 2026) is simple, but on a driver with a cheap overnight EV tariff it pays far more than the electricity actually costs.

Reimbursing the real kWh cost of each driver's own tariff, read from the car, is what Voltaback does. You can estimate the difference for your fleet in the home charging cost simulator. The full cost picture, including residual values, is in our analysis of fleet total cost of ownership.

Sources: HMRC EIM23900, GOV.UK, Advisory fuel rates.

Common mistakes and checkpoints

• Claiming the 100% FYA on a plug-in hybrid. Only zero-emission cars qualify.
• Claiming the FYA on a second-hand EV. Used EVs go to the main pool at 14%.
• Claiming the AIA or full expensing on a car. Cars are excluded; vans are not.
• Using 18% for the main pool in 2026/27. The rate has been 14% since April 2026, with a hybrid rate for straddling periods.
• Forgetting the balancing charge. Budget the tax on sale proceeds of EVs that had the FYA.
• Recovering VAT on home charging. The employer cannot, because the supply is made to the employee.
• Missing the deadline. Expenditure after 31 March 2027 (companies) is not covered by the current FYA.
• Restricting a company's allowance for a director's private use. Companies claim the full cost; private use is taxed through BIK.

What to take away, by role

Finance director or business owner. A new EV bought before the 2027 deadline is fully deductible in year one. Plan deliveries around the date, model the balancing charge at sale, and compare with leasing on cash flow and residual value risk, not just on tax. If the FYA is not extended beyond March 2027, new EVs bought later will fall into the main pool at 14%, which changes the buy-or-lease answer for the next renewal cycle.

Fleet manager. Keep the CO2 figure and the new or used status of each car in the fleet list: they drive the tax treatment. Watch delivery dates on orders placed in early 2027.

HR and reward. The company's allowance and the driver's BIK are separate. An EV gives both a fast allowance and a low BIK; a PHEV gives neither.

Sole trader. Track business and private mileage: it sets your allowance share and your VAT recovery on charging.

The wider tax picture for electric company cars, from VED to BIK, is in our guide to the tax on electric company cars.

After the purchase, the cost that remains is energy

The 100% first-year allowance makes 2026/27 the last confirmed year to buy new electric company cars with full relief in year one. Once the car is on the fleet, the recurring cost that changes most from one driver to another is the electricity, mostly drawn at home.

Voltaback is 100% software: it reads charging sessions from the car (more than 48 brands connected), values each kWh at the driver's real tariff, and produces a monthly export ready to import into your payroll software. Voltaback relies on the home's MID-certified meter, not on a standalone cable meter. More than 200 companies use it, with ISO 27001 certification since 2 December 2025 and no geolocation ever shared with the employer.

See how it fits your finance and fleet processes on our fleet manager platform page, or talk to us about your fleet.