Capital allowances

Capital allowances are a relief given by HMRC to businesses when the business makes capital purchases such as:

• vehicles
• machinery and
• computer equipment.

The amount of allowance given depends on the type of asset purchased.

Capital allowances are tax deductible and therefore the greater the capital allowance in the current period, the lower your reported profits will be. Capital expenditure is deemed to be items purchased in the business which provides an ‘enduring benefit’ to the business. In other words, you expect to use for the long term – i.e 2 years or more.

If you’re a sole trader or partner and have an income of £150,000 or less a year, you may be able to use a simpler system called cash basis instead.

The annual investment allowance known as the AIA is an annual limit which HMRC set which effectively gives you a 100% allowance on the purchase of capital expenditure.

The AIA is set at £1m in 2024, and has been since 2019. This means that up to £200,000 of capital expenditure will attract 100% allowances in the period in which they are purchased which is fantastic for businesses and encourages them to invest in plant and machinery. Unfortunately, cars do not attract the AIA but integral features do.

Prior to 1 January 2019, the AIA was £200,000 per annum.

First-year allowances (FYA) are available on energy efficient pieces of capital expenditure. The rate is 100% and is there to encourage businesses to purchase energy efficient pieces of capital expenditure.

Writing down allowances are the annual percentages that your assets qualify for.

Any capital items which qualify (see When can I claim a capital allowance? above) that do not attract the annual investment allowance (AIA) or first year allowances (FYA) will attract either 18% or 6%* each year (*decreasing from 8% from prior to April 2019).

Most of your ordinary plant and machinery will attract 18%; integral features and high emission cars attract 6% (a high emission car has carbon emissions of more than 110gm/km).

When you’ve worked out your capital allowances, claim on your:

• Self Assessment tax return if you’re a sole trader
• Partnership tax return if you’re a partner
• Company Tax Return if you’re a limited company – you must include a separate capital allowances calculation

What date do I use for capital allowance purposes?

Usually, It is the date where the business has an unconditional obligation to pay i.e. the delivery date but there are different rules with hire purchase and assets purchased with long payment terms.

Do I have to claim capital allowances?

In short, no. AIA, FYA and the normal writing down allowances (WDAs) are optional. Capital allowances reduce profits but you don’t have to claim them. There may be situations where you would prefer to delay the claim to a later year e.g. if you have low profits below the personal allowance.

Is the maximum allowance I can claim on a car 18% each year?

No, if you are able to buy an energy efficient car i.e. one with low emissions, you can claim 100% in the year of purchase. The threshold is currently is 75gm/km or less.