What are capital allowances?
Capital allowances are the UK tax relief businesses claim on the cost of equipment, machinery and vehicles, in place of depreciation, which is not tax deductible.
What capital allowances means
When a business buys an asset it will use for several years, the accounts spread the cost through depreciation. HMRC ignores that charge. Instead, the tax rules give their own deduction, called capital allowances, on qualifying spending on plant and machinery: computers, tools, machinery, vans, office furniture and many fixtures in commercial property.
They apply to sole traders, partnerships and companies. Buildings themselves get a separate, smaller relief, the structures and buildings allowance.
The main allowances
- Annual Investment Allowance (AIA): 100% relief in the year of purchase on up to £1 million of qualifying plant and machinery a year. Most small businesses never reach the limit. Cars do not qualify.
- Full expensing: companies can deduct 100% of the cost of new and unused main-rate plant and machinery with no upper limit, and 50% on special-rate assets.
- Writing down allowances: for spending not covered above, a percentage of the remaining pool each year. Special-rate items, such as integral features and cars with higher emissions, get a lower rate.
- Cars: new zero-emission cars can qualify for a 100% first-year allowance; other cars go into a pool based on their CO2 emissions.
Writing down allowance rates have been under review, so check the current rate for the year you buy.
Example
A limited company makes £70,000 profit before buying a £30,000 van and £5,000 of computers in the same year.
| Accounts | Tax | |
|---|---|---|
| Profit before asset costs | £70,000 | £70,000 |
| Depreciation (4 years) | (£8,750) | added back |
| AIA on van and computers | (£35,000) | |
| Profit | £61,250 | £35,000 |
Taxable profit of £35,000 is within the small profits rate, so Corporation Tax is £6,650 at 19%, compared with £14,800 if no allowances had been claimed on £70,000.
Why it matters for your business
Timing purchases matters. Buying equipment just before your year end brings the tax relief forward by a year. If the asset is later sold, a balancing charge can claw some relief back, so keep records of what was claimed. Assets used partly privately, common for sole traders, only get relief for the business share.
Keeping records
Keep invoices and a fixed asset register showing what was claimed and when. You will need them when an asset is sold or scrapped.
Common questions
Not through the Annual Investment Allowance. New zero-emission cars can qualify for a 100% first-year allowance. Other cars are pooled and receive writing down allowances at a rate that depends on their CO2 emissions. Vans and pickups with a payload over one tonne count as vans and do qualify for the AIA.
Mostly not. Under the cash basis, the cost of equipment is simply deducted as an expense when paid, which works out the same as the AIA for most purchases. Cars are the exception and still use capital allowances.