From my childhood to date I have always been fascinated by cars. Being stuck in traffic is made bearable by the safari-park-like atmosphere created by the huge array of different car models, barely feet away from me, for me to observe in their natural habitat!

I have recently noticed high earners splashing out on cars from a different market. No longer do only prestige cars appeal to such people, but tax efficient cars are becoming all the rage.

If you are self-employed and use a car for business purposes, there is no denying the financial benefit of buying one of these cars new, compared to another new car.

Whether that particular car is suitable for you is of course a different matter!

The Inland Revenue’s rules specify that 100% first year allowance may be claimed on a new car bought between 17^th April 2002 and 31^st March 2008 if it is electric or it’s CO2 emissions are less than 120gm per km. The car must not be second hand.

This means that if you splashed out on a qualifying car costing you £7,000 and you utilized it to the extent of 40% business use, your taxable profit would be £2800 lower (£7,000 at 40%).

If you are a higher rate taxpayer (41%), that’s about £1,148 less tax to pay, so the car has effectively only cost you £5,852.

Not bad.

If this car were not environmentally friendly, you would get a capital allowance of the lower of 25% of the Written Down Value (WDV in accountancy jargon!) and £3,000. In the example, this would mean that your taxable profit would reduce by £700 (£7,000 at 25% at 40% business use). To a higher rate taxpayer, that’s a tax saving of £287 – a quarter of what it would be if that car were environmentally friendly!

The rules are slightly different if you buy a car costing more than £12,000 due to the £3,000 maximum mentioned above. Let’s say you bought a car for £13,000. Basically, if you are a higher rate tax payer utilizing your car to the extent of 40% business use, you would pay £2,132 less tax if the car was environmentally friendly and £492 less tax if it was not environmentally friendly. That’s more than three times the tax relief as for a non-environmentally friendly car – there’s motivation for you!

But specifically which cars qualify, and more importantly are they suitable for your needs?

You may be surprised at the range of cars which qualify – they are not all tiny battery powered ones which go about 20 miles per hour, but decent comfortable cars which may rival normal cars in all aspects.

As this is a personal choice I have merely listed a few possible alternatives below and, if interested in buying such a car, would urge you to consult one of the car magazines such as What Car? and also book for free test drives.

A few cars with CO2 emissions of less than 120gm per km are:

• Audi A2 1.4 TDI
• Citroen C3 1.4 Hdi LX
• Ford Fiesta 1.4 TDCi CL (14" Tyre)
• Peugeot 206 1.4 Hdi LX
• Renault New Clio 1.5 dci (65 bhp)
• Volkswagon Lupo 1.4 (75 bhp)
• Micro Compact Car Smart City Coupe

Another incentive for buying a "green" car arises if you currently suffer the congestion charge.

Certain cars such as "Electric Hybrids" will not only get you 100% first year allowance, but may also exempt you from paying the congestion charge!

One such example is the Toyota Prius.

You now know how to save yourself some money, so happy driving!

Mac Kotecha (FCA) is a Chartered Accountant who deals exclusively with dentists and has been established for over 25 years. His company offers Accountancy, taxation & payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues.