Capital Allowances on Cars: Balancing Adjustments, Business Closure, and the Electric Car Question

What happens when you sell a car held in its own pool, what cessation means for every capital allowance you have built up, and the current tax position on zero-emission vehicles.

This article covers what happens at disposal, what cessation of a business triggers, and the current treatment of zero-emission cars, which has become one of the most practically significant areas of capital allowances planning for small and medium-sized businesses.

Balancing Adjustments: When You Sell a Car

When a car has been held in its own pool (because of private use), and that car is sold, no writing down allowance (WDA) is given in the year of disposal. Instead, the sale proceeds are deducted from the tax written down value (TWDV) at the start of the period, and a balancing adjustment arises.

There are two possible outcomes:

Balancing allowance: arises when the disposal proceeds are less than the TWDV. The shortfall is a final deduction in the year of sale, giving relief on the remaining unrelieved cost.

Balancing charge: arises when the disposal proceeds exceed the TWDV. The excess is added back as taxable income, clawing back some of the relief already given.

Where there is private use, both the balancing allowance and the balancing charge are restricted to the business proportion only.

Example: Nina Sells Her Car for Less Than Its Value

Nina runs a landscape gardening business as a sole trader. Year ended 31 March 2025. Her Honda HR-V (CO₂ 122 g/km) has a TWDV of £16,500 at 1 April 2024. She uses it 78% for business. In November 2024 she sold it for £14,200. Her general pool TWDV at 1 April 2024 is £23,000.

Nina’s car pool closes in the year of sale. The £2,300 shortfall between TWDV and proceeds is a balancing allowance, but only the business proportion (78%) is deductible. The remaining 22% (£506) is lost: it represents private use that never attracted relief.

Example: Marcus Sells His Car for More Than Its Value

Marcus runs a quantity surveying consultancy. Year ended 31 March 2025. His Audi A7 (CO₂ 185 g/km) has a TWDV of £18,000 at 1 April 2024. He uses it 80% for business. In September 2024 he sold it for £21,000. His general pool TWDV at 1 April 2024 is £40,000.

The balancing charge of £2,400 (business portion of the excess over TWDV) reduces Marcus’s net capital allowances in the year. The 20% private use element of the charge (£600) does not arise, again reflecting that private use never received relief and cannot be clawed back.

Note: The examples above use 18% WDA for the year ended 31 March 2025 (correct for that period). From April 2026, the main rate reduced to 14%. The general pool WDA figure for Marcus would be 14% of £40,000 = £5,600 for a period ending after April 2026, not £7,200. Balancing adjustments on own-column cars are unaffected by the main rate change; only the general pool WDA changes.

Cessation of a Business: Everything Gets Closed

When a business permanently ceases to trade, there is no next accounting period. Every pool, including the general pool and the special rate pool, must be closed. The final accounting period is the last one before the business stops.

In the cessation period, no WDA, AIA, or FYA is given on any pool. Instead, all assets in all pools are treated as disposed of at their market value on the date of cessation (or, if a sole trader retains an asset for personal use, at market value on that date). Balancing adjustments arise in every pool as a result.

This can produce significant balancing allowances on the general pool if the pool balance is large relative to the value of assets remaining in it. It can also produce balancing charges on own-column assets (such as a car retained by the sole trader) if the market value has held up better than the TWDV would suggest.

Cessation rule: No WDA, AIA, or FYA in the final period. All pools close. All disposals at market value or actual proceeds. Balancing adjustments arise on every pool. Section 65 CAA 2001.

Zero-Emission Cars: The Current 100% Relief

A zero-emission car (one with CO₂ emissions of exactly 0 g/km) that is new and unused at the point of purchase qualifies for a 100% First-Year Allowance (FYA). The full cost is deducted from profit in the year of purchase, with no WDA spreading the relief over subsequent years.

This allowance was originally set to expire in April 2025. It was extended by the Autumn 2025 Budget to 31 March 2027 for corporation tax purposes and 5 April 2027 for income tax purposes. Businesses buying a qualifying zero-emission car before those dates can claim the full cost immediately.

The 100% FYA applies whether the car is used wholly for business or partly for private purposes. Where there is private use by a sole trader or partner, only the business proportion of the 100% FYA is claimed, just as with WDA.

Second-hand zero-emission cars do not qualify for the FYA. They enter the general pool at the current 14% WDA rate (reduced from 18% in April 2026), in an own column if there is private use.

The Business Car Question: Factors Worth Understanding

A common question from business owners is whether it is better to buy a car through the business or personally. There is no single answer. The right outcome depends on several variables that interact with each other, and they land differently depending on whether the business is a sole trader, partnership, or limited company.

The following sets out the relevant factors. It is not a recommendation of any particular route.

CO₂ emissions and the rate of relief

For a sole trader or partner, the CO₂ band determines how quickly the cost comes off taxable profit. A high-emission conventional car at 6% per year recovers very slowly. A zero-emission car at 100% FYA recovers immediately. If the car is going to be in the business regardless, the emission level significantly affects the timing of tax relief.

Private use reduces the capital allowance

A sole trader using a car 60% for business can only claim 60% of the WDA. The other 40% is never recovered. In a limited company, the full WDA is available on the car, but the director pays income tax and national insurance contributions on the Benefit in Kind (BIK), calculated as a percentage of the car’s list price based on its CO₂ emissions.

BIK rates: the current year position

For 2026/27 (the current tax year), the BIK rate on a zero-emission company car is 4% of list price. In 2025/26 it was 3%. On a petrol car with CO₂ of 120 g/km, the BIK rate for 2026/27 is approximately 31%. On a diesel at the same emissions, approximately 34%.

To put those figures in terms of real money: a director of a limited company taking a £40,000 electric car as a company vehicle pays income tax on £1,600 (4% of £40,000 in 2026/27). The equivalent for a petrol car at 120 g/km would be income tax on approximately £12,400 (31% of £40,000). At a 40% income tax rate, that is a personal tax bill of £640 on the electric car versus approximately £4,960 on the petrol equivalent. The gap is substantial.

BIK rates for non-electric cars increase by approximately 1 percentage point per year. Zero-emission car BIK rates are on their own schedule: 4% in 2026/27, 5% in 2027/28, rising to 7% in 2028/29. They remain very low relative to conventional cars. Always confirm current rates from HMRC’s published tables before advising or making decisions.

The contrast matters most for limited company owners who are higher-rate taxpayers and are considering running an electric car through the company. The combination of 100% FYA on the company side and low BIK on the personal side can make this one of the more tax-efficient positions currently available to small limited companies.

VAT

VAT (Value Added Tax) on the purchase of a car is blocked from recovery in almost all cases, even where the business is registered for VAT. The exception is where there is absolutely no private use whatsoever, which is extremely difficult to demonstrate for a car. This applies whether the car is bought through a sole trader business or a limited company.

Finance lease

A car taken on a finance lease is not treated as owned by the business for capital allowances purposes. No WDA is available. The lease payments are deducted as a trading expense in the income statement (the profit and loss account), but where the car has CO₂ emissions over 50 g/km, 15% of the rental cost is disallowed. The BIK rules still apply if a company provides the car to an employee or director.

Completing the Capital Allowances Series

This pair of articles covers cars in full. Subjects 07 and 08 in this series cover what qualifies as plant and machinery and how the general pool calculation works. Subject 09 covers the Annual Investment Allowance, First-Year Allowances for zero-emission goods vehicles, and the rules on fixtures in property transactions.

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This article is for general information only. Tax rules change and individual circumstances vary. Consult a qualified tax adviser before making decisions based on information here. BIK rates shown are for 2026/27; 2025/26 rates are included for comparison. WDA rates reflect the current 14% main rate (effective from April 2026) and 6% special rate.

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