Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead.

Where the cash basis is used, it is not possible to deduct the full cost of the car in the year of purchase – such a deduction is prohibited under the cash basis capital expenditure rules.

No annual investment allowance

The annual investment allowance (AIA) allows immediate write-off for the full purchase cost in the year of acquisition, as long as enough of the £1 million AIA allowance for the year remains available. Unlike vans, cars do not qualify for the AIA, and unless the car is eligible for a first-year allowance, it is not possible to obtain 100% relief immediately.

Full expensing and 50% first-year allowance not available

Similarly, companies are unable to benefit from full expensing or the 50% first-year allowance for new cars that are not eligible for the 100% first-year allowance.

100% first-year allowance for electric cars

While the AIA and full expensing are unavailable, a 100% first-year allowance is available for expenditure on new electric cars. This provides immediate relief for the full cost of a new electric car in the year of purchase. The 100% first-year allowance is only available in respect of expenditure on a new electric car; it is not available on the purchase of a second-hand electric car. Writing down allowances are available instead.

Writing down allowances

If the first-year allowance is not available and simplified expenses have not been claimed, relief for expenditure on a car used for business purposes is given by means of writing down allowances. The rate of the allowance depends on the car’s CO2emissions.

Main rate writing down allowances at the rate of 18% are available for new and second-hand cars whose CO2 emissions are 50g/km or less (including second-hand electric cars). New or second-hand cars with CO2 emissions of more than 50g/km qualify for special rate capital allowances at the rate of 6%.

Private use adjustment

If a car is used for both personal and business use, capital allowances are only available in respect of the business use. For example, if a sole trader uses their car for both business and private use and estimates that business use accounts for 60% of the total use, an adjustment would be needed to account for the private use. To do this, the writing down allowance would be reduced by 40%.

Consider simplified expenses instead

Sole traders and partnerships can take advantage of the simplified expenses system and deduct an amount based on the business mileage in the tax year when calculating their taxable profit. The deduction is given at a rate of 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business mileage. Where simplified expenses are used, capital allowances cannot be claimed as well. Likewise, if capital allowances have been claimed, the simplified expenses system cannot then be used.

Companies are not able to claim simplified expenses and instead obtain relief for expenditure on cars in the form of capital allowances.

Self-employed earners whose earnings exceed the lower profits limit (set at £12,570 for 2025/26) must pay Class 4 National Insurance contributions on their profits. These are payable at the rate of 6% on profits between the lower limit and the upper limit, set at £50,270 for 2025/26, and at a rate of 2% on profits in excess of the upper profits limit. It is the payment of Class 4 National Insurance contributions which provides a self-employed earner with a qualifying year for state pension purposes.

Where profits from self-employment are below £12,570 for 2025/26, a self-employed earner will not have to pay Class 4 National Insurance contributions for that year. However, if their profits are at least equal to the small profits threshold, which is set at £6,845, the self-employed earner receives a National Insurance credit which provides them with a qualifying year for state pension purposes without them having to pay anything for it.

However, self-employed earners whose profits are below £6,845 do not benefit from the credit. This means that unless they receive other credits, for example, because they receive child benefit, or have paid sufficient Class 1 contributions, they will need to pay voluntary contributions for 2025/26 to be a qualifying year.

Voluntary Class 2

Self-employed earners whose profits are less than the small profits threshold can pay voluntary Class 2 contributions instead of paying Class 3 voluntary contributions. This is a much cheaper option – for 2025/26, voluntary Class 2 contributions are payable at a rate of £3.50 a week whereas Class 3 contributions are £17.75 a week. Paying voluntary Class 2 contributions rather than Class 3 contributions for 2025/26 will save the individual £741.

Although paying voluntary Class 2 contributions will only cost £182 for 2025/26, before opting to pay them, it is important to check whether it will be worthwhile.

To receive a full state pension, a person needs 35 qualifying years. If they have this already or will do so by the time that they reach state pension age, there is no point in making the contributions. A person can check their state pension forecast by visiting the Gov.uk website at www.gov.uk/check-state-pension.

A person who has less than 35 qualifying years but at least ten will receive a reduced state pension. Paying voluntary contributions is worthwhile if after doing so a person will have a least ten qualifying years. If after making the contributions they will still not have reached ten qualifying years and are unlikely to do so by the time they reach state pension age, making voluntary Class 2 contributions is not worthwhile.

Contributions are paid through the Self Assessment system. There is a six-year window in which to pay the contributions.

There are various ways to enjoy savings income without paying tax on it. In addition to the personal allowance, basic and higher rate taxpayers benefit from a personal savings allowance. Taxpayers whose taxable non-savings income is not more than £5,000 can also enjoy a zero rate on savings income in the savings rate band. In addition, savings income held in tax-free accounts such as ISAs can also be enjoyed free of tax.

Personal allowance

If the personal allowance has not been fully used elsewhere, the balance can be set against savings income allowing it to be received tax-free.

Savings allowance

Basic and higher rate taxpayers are entitled to a savings allowance. This is in addition to their personal allowance.

For 2025/26 the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance.

Rising interest rates in recent years may mean that basic and higher rate taxpayers now receive interest in excess of their savings allowance on which tax is payable and which must be notified to HMRC on their Self Assessment tax return. Consequently, they may need to file a tax return where previously they did not need to.

Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £125,140) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt. They do not receive a personal allowance either as the personal allowance is fully abated at this level. Unless savings income is derived from tax-free accounts, additional rate taxpayers will pay tax on it.

Savings starting rate

Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on an individual’s personal circumstances, they may be able to enjoy up to a further £5,000 of savings income tax-free.

The savings starting rate band is set at £5,000 for 2025/26, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2025/26. The savings starting rate band is eroded once taxable income in excess of the personal allowance reaches £5,000 (income of £17,570 and above).

The savings starting rate is applied before the personal savings allowance.

Tax-free savings accounts

If savings are held within a tax-free wrapper such as an Individual Savings Account, the associated savings income is tax-free. A taxpayer can invest up to £20,000 in an ISA in 2025/26. ISAs are attractive to additional rate taxpayers who do not benefit from personal and savings allowances.

Maximum tax-free savings income

Where a person has the personal allowance available in full to set against their savings income, they can enjoy tax-free interest on their savings of £18,570 in 2025/26 (personal allowance of £12,570 plus savings starting rate band of £5,000 plus savings allowance of £1,000), plus that from tax-free savings accounts.

Employers are able to provide employees with a range of health and welfare benefits without giving rise to a tax charge under the benefits in kind legislation.

1. Health screening and medical check-ups

Employees can benefit from one health screening assessment or medical check-up each tax year free of tax. A health screening assessment is an assessment to identify employees who may be at particular risk of ill health, while a medical check-up is a physical examination of the employee by a health professional for the sole purpose of determining the employee’s state of health.

• Eye tests and corrective appliances

Employees who are required to have an eye test under regulations made under the Health and Safety at Work Act 1974 (which is the case where employees use display screen equipment) must be provided with one by their employer. The provision of such a test does not constitute a taxable benefit. Similarly, if the test shows that the employee needs glasses or other corrective appliances, these too can be made available by the employer free of tax if they are provided solely for use for display screen work. However, the exemption only applies if the tests and corrective appliances are made available to all the employees who need them.

Where eye tests or glasses are provided or paid for by the employer in other circumstances, a tax liability will arise.

• Recommended medical treatment

An employer is able to provide recommended medical treatment to an employee or reimburse the cost of such treatment up to the value of £500 without a tax liability arising. Recommended medical treatment is recommended by a health professional for the purpose of assisting an employee to return to work after a period of absence due to injury or ill health. The treatment must be provided after an employee has been absent from work for at least 28 consecutive days.

• Overseas medical treatment

While an employee is working abroad, the employer can meet the cost of any medical treatment that arises, and also the cost of medical insurance to cover the cost of overseas medical treatment, without triggering a tax charge under the benefits in kind legislation. However, the provision of medical treatment in the UK and private medical insurance are taxable benefits.

• Welfare counselling

The provision of certain types of welfare counselling to employees is exempt from tax. Although the exemption is tightly drawn, it covers counselling for problems such as stress, work problems, debt problems, alcohol and drug dependency, career concerns, bereavement, equal opportunities, ill health, sexual abuse, harassment and bullying, conduct and discipline and personal relationship difficulties. However, advice on finance (other than debt problems), tax, leisure or recreation and legal advice are specifically excluded from the scope of the exemption.

In a post on X, HMRC recently warned taxpayers ‘not to get caught out by ads promising quick refunds for working from home’, urging taxpayers to check that they were eligible before making a claim.

So what relief is available to employees who sometimes or always work from home?

The rule

A deduction can be claimed for employment expenses to the extent that they are incurred wholly, exclusively and necessarily in the performance of the duties of the employment. In relation to expenses incurred when working from home, HMRC accept that this test is met in the following circumstances:

• The duties that the employee performs at home are substantive duties of the employment. These are duties that an employee has to carry out that represent all or part of the central duties of the employment.
• The duties cannot be performed without the use of appropriate facilities.
• No such appropriate facilities are available to the employee at the employer’s premises or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect the employee to travel to the employer’s premises daily.
• At no time before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

Personal choice

The test is not met where an employee works from home through personal choice rather than because they are required to work from home. For example, where an employer operates a flexible working policy whereby employees must work from the employer’s premises on certain days and can choose whether to work at the employer’s premises or at home on the other days, the employee cannot claim tax relief for additional household costs on the days that they choose to work from home, even if they do the same work on these days that they would have done at the employer’s premises. However, where an employee is contractually obliged to work from home, they are able to claim a deduction for additional household expenses incurred as a result.

Making a claim

Where the conditions are met, the employee can claim a fixed deduction of £6 per week for the weeks when they work at home at least some of the time. Alternatively, they can claim the actual additional household costs, such as additional electricity, gas and cleaning costs, that they incur as a result of working from home. A claim based on actual expenses is only worthwhile where the amount claimed is more than £6 per week.

A claim can be made online (where the total claim in respect of employment expenses is not more than £2,500), in a Self Assessment return or by post on form P87. The employee must supply evidence to show that they are required to work from home, such as a copy of their employment contract. Where the claim is based on actual amounts, evidence, such as copies of bills, must be provided in support of the amount claimed.

Employer’s National Insurance rose considerably from 6 April 2025. Not only did the rate increase from 13.8% to 15%, but the secondary threshold also fell from £9,100 to £5,000. This is the amount that an employer can pay before a liability to secondary Class 1 National Insurance contributions arises. For 2025/26, the secondary threshold is equivalent to only £96 per week and £417 per month.

For employers who are able to benefit from the Employment Allowance, there is an element of relief as this was increased to £10,500 for 2025/26. However, this does not help personal companies where the sole employee is also the director as they are not entitled to the Employment Allowance.

NIC hit on a small salary

For 2025/26, at £96 per week the secondary threshold is now less than the lower earnings limit, which has increased to £125 per week for 2025/26. For a year to be a qualifying year, an individual must receive earnings of at least 52 times the weekly lower earnings limit. For 2025/26, the minimum salary to achieve this is £6,500.

In the absence of the Employment Allowance, a secondary liability of £225 will arise on a salary of £6,500. However, there are no employee contributions to pay as where earnings are between the lower earnings limit and the primary threshold, the employee is treated as paying contributions at a zero cost. If the director is paid a salary equal to the personal allowance of £12,570, the associated secondary liability is £1,135.50.

Access the Employment Allowance

By taking on an employee and paying them earnings in excess of the secondary threshold, a personal company is able to access the Employment Allowance, which can be set against their secondary Class 1 National Insurance liability. The eligibility test is simply that the secondary contributor incurs liabilities to pay secondary contributions in respect of the employee – there is no minimum period for which these liabilities need to be incurred; employing another employee for £97 for one week will do the trick. However, a safer option to avoid unwanted attention from HMRC may be to take on, say, a student during the summer holidays to do some work, or to employ a spouse on a part-time basis.

The other way to access the Employment Allowance is to ensure that the sole employee is also not a director. Resigning as director and appointing a spouse as the director instead will access the Employment Allowance without needing to take on another employee.

Accessing the Employment Allowance will shelter the secondary liability that would otherwise arise, allowing the director to be paid a salary of up to £12,570 for 2025/26 free of tax and National Insurance.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is introduced progressively from 6 April 2026. It will require unincorporated traders and landlords whose income is over the trigger threshold to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.

The start dates for traders and landlords with trading and/or property income in excess of £30,000 have been known for some time (albeit they are now later than originally announced). At the time of the Autumn 2024 Budget, the Government stated that MTD for ITSA would be extended to apply to traders and landlord with trading and/or property income of £20,000 or more before the end of the current Parliament. At the time of the 2025 Spring Statement, it was announced that it will apply to them from 6 April 2028.

Start dates

The first start date is 6 April 2026. This is for individuals with income from an unincorporated trading and/or property business of at least £50,000.

The second start date is 6 April 2027. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £30,000.

The final start date is 6 April 2028. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £20,000.

As of yet, no date has been announced from which individuals with combined trading and property income of less than £20,000 will be brought within MTD for ITSA.

The income is the combined trading and property income from all sources before the deduction of expenses. An individual will be within MTD for ITSA if their total trading and property income exceeds the trigger threshold even if the income from each individual business is below it. The relevant income for assessing whether an individual is within the scope of MTD for ITSA from 6 April 2026 is that for 2024/25.

Once within MTD for ITSA, an individual must remain within it unless their income is below the prevailing threshold for three consecutive tax years.

Case studies

Abigail is a sole trader with trading income of £45,000 in 2024/25. She also receives rental income from a buy-to-let of £12,000. Although individually neither her trading nor her property income is more than £50,000, as her combined trading and property income at £57,000 is more than the threshold, she will be within MTD for ITSA from April 2026.

Billy has trading income of £35,000. As long as he remains at this level, he will be within MTD for ITSA from April 2027

Caitlin runs two small sole trader businesses. Her income from one is £15,000 a year and her income from the other is £7,000 a year. If her income remains at this level, she will be within MTD for ITSA from 6 April 2028.

It is important that traders and landlords are aware of their start date and plan ahead so that they are ready to comply from that date.

Employees may pay for the fuel that they use for business journeys undertaken in their own car or in a company car. Often, an employer will reimburse this cost by paying a mileage allowance. However, where employees meet the costs themselves, they are able to claim tax relief. The relief available depends on whether the employee is using their own car or a company car. Employees are also able to claim relief if their employer pays a mileage allowance which is less than the tax-free rates set by HMRC.

Employees using their own car for business travel

Where an employee uses their own vehicle for business travel, they are able to claim tax relief using the approved mileage rates set by HMRC. A claim is not limited to cars – relief can also be claimed if an employee uses their van, motorbike or bicycle for business travel. The amount that they can claim is the amount at the approved rates less any amount received from their employer towards the costs. The approved rates, which are set out in the table below, include an element for deprecation, insurance and maintenance, as well as the cost of the fuel. For cars and vans, a higher rate applies to the first 10,000 business miles in the tax year.

Type of vehicle	Rate per mile
Cars and vans	First 10,000 business miles in the tax year: 45p Subsequent business miles: 25p
Motorcycles	24p
Bicycles	20p

Example

Wendy uses her own car for business travel, driving 2,100 miles in the tax year. Her employer pays a mileage rate of 30p per mile.

The approved amount is £945 (2,100 miles @ 45p per mile). Wendy receives mileage payments of £630 from her employer (2,100 miles @ 30p per mile). Wendy is able to claim tax relief for the shortfall of £315.

Company car drivers

Company car drivers can claim tax relief for the cost of fuel or electricity used for business journeys in a company car to the extent that this is not reimbursed by their employer. They will need to keep records of the actual fuel or electricity costs. The approved mileage rates do not apply to company car drivers.

Making a claim

A claim can be made using HMRC’s online service or, where the employee needs to complete a Self Assessment tax return, in the employment pages of their tax return. A claim can also be made by post on form P87. The employee will need to provide evidence in support of their claim in the form of a mileage log. This must show:

• the reason for every journey;
• the postcode for the start point; and
• the postcode for the end point.

Where a claim is made for more than one employment, a copy of the mileage log must be provided for each claim.

As the 2024/25 tax year has now come to an end, individuals who need to file a Self Assessment tax return for that year can now do so. Although the return does not have to be filed online until 31 January 2026, there are benefits of filing early.

1. Get it out of the way

There is something very satisfying about ticking an item off a ‘to do’ list. Filing your 2024/25 tax return sooner rather than later will get it out of the way and mean that is no longer hanging over you. This will give you peace of mind.

• Certainty as to your tax bill

Once you have filed your 2024/25 tax return you will know how much tax you need to pay. This will give you plenty of time to set funds aside to pay the January 2026 bill, and also to set up a Time to Pay arrangement if you will need to pay in instalments.

• Code out underpayments

If you are a PAYE taxpayer and you owe £3,000 or less, as long as you file your 2024/25 tax return by 30 December 2025, you can opt to have the tax that you owe collected through your 2026/27 tax code. This delays the payment date and effectively gives you an interest-free instalment plan.

• Get a repayment sooner

If you have overpaid tax for 2024/25, the sooner you file your tax return, the sooner you will be able to receive a refund of the overpaid tax.

• Review your payments on account

The final payment on account for the 2024/25 tax year is due by 31 July 2025. If you already know your 2024/25 liability, you can review your payments on account and reduce them to the correct level if they are too high, so you do not pay more than you need to in July.

• Ascertain whether you are within MTD for ITSA from April 2026

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) applies from 6 April 2026 onwards to individuals running unincorporated trading and/or property businesses with trading and/or property income of £50,000 or more. The relevant income is that for 2024/25. Once the 2024/25 tax return has been filed, traders and landlords will be able to determine whether they must comply with MTD for ITSA from April 2026. The earlier they know, the longer they have to prepare.

• Assess transitional profits

Self-employed earners with an accounting date other than one between 31 March and 5 April may have transition profits in 2023/24. These profits are normally spread over five years (2023/24 to 2027/28 inclusive) unless the trader elects for these to be assessed earlier. Once the 2024/25 return has been filed, you will know your profits and marginal rate of tax for this year and can assess whether it would be beneficial to bring forward some transition profits to 2024/25. This will be advantageous if they will be taxed at a lower rate in 2024/25 than in later years, or if the personal allowance has not been fully used.

• Proof of income

Your tax return calculation provides you with proof of income which may be needed if you want to apply for a mortgage or a loan.

• Assist with tax planning

Filing your 2024/25 tax return will provide you with information to enable you to review your tax affairs and take advantage of planning opportunities to save tax going forward.

1. Earn brownie points with your tax adviser

The run up to the 31 January deadline is a very busy time for accountants and tax advisers. They are likely to look favourably on clients who provide their tax return information early in the following tax year, allowing them to file the return ahead of the January rush.

Employees with a company car available for their private use pay tax on the benefit. The amount that is charged to tax is a percentage of the list price of the car and any optional accessories, as adjusted to reflect any capital contributions made by the employee up to £5,000. The percentage, which is known as the ‘appropriate percentage’, depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars that fail to meet emissions standards. The charge is adjusted to reflect certain periods during the tax year when the car was not available to the employee for their private use, and also any contributions made by the employee in respect of their private use of the car.

Changes applying from 2025/26

For the 2025/26 tax year, having a company car will become slightly more expensive. The appropriate percentages are increased by one percentage point up to the maximum charge of 37%. This means that an employee with an electric car will now be taxed on 3% of the list price of the car and optional accessories, compared to a charge of 2% for 2024/25. At the other end of the scale, the maximum charge of 37% will apply to cars with CO2 emissions of 155g/km and above.

This change will mean that an employee with a company car with a list price of £30,000 paying tax at the higher rate will pay £120 more in tax on their company car in 2025/26 than in 2024/25. Employers will also pay more in Class 1A National Insurance, both as a result of the increase in the appropriate percentage and also as a result of the increase in the Class 1A charge from 13.8% to 15%.

Looking ahead – 2026/27 and beyond

With the number of company car drivers choosing electric company cars increasing, the Government are reducing the tax breaks in order to maintain their revenue stream. For 2026/27, the appropriate percentages applying to cars with CO2 emissions of 74g/km or less are increased by one percentage point, while the appropriate percentages for cars with CO2 emissions of 75g/km and above are maintained at their 2025/26 level. It is a similar story for 2027/28 – the appropriate percentages for cars with CO2 emissions of 69g/km and below are increased by one percentage point, with the appropriate percentages for cars with CO2 emissions of 70g/km and above remaining unchanged.

There are further changes to come in both 2028/29 and 2029/30. In each of those years, the appropriate percentage for zero emission cars will increase by two percentage points. This means that for 2028/29, electric company car drivers will be taxed on 7% of the list price of their car and optional accessories. For 2029/30, this will increase to 9%.

From 2028/29, the amount charged to tax in respect of cars in the 1 to 50g/km band will no longer depend on the car’s electric range. Instead, the appropriate percentage for cars in this band will be set at 18% in 2028/29 and at 19% in 2029/30. For cars with the greatest electric range (more than 130 miles), this is a significant hike – from 5% in 2027/28 to 18% in 2028/29.

As far as other cars are concerned, the appropriate percentages will increase by one percentage point in both 2028/29 and in 2029/30. The maximum charge will also rise – to 38% in 2028/29 and to 39% in 2029/30.

Plan ahead

Drivers typically have a company car for three or four years. When changing their company car, employees should not only consider the current rates, but also those applying in future tax years. For electric and low emission cars in particular, significant tax hikes are on the horizon.