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Capital allowances can be used to claim tax relief on things that have been purchased for business use e.g. equipment, vehicles, and R&D costs. In the eyes of HMRC, capital allowances are classed as another business expense.
If you’re self-employed or a sole trader, capital allowances must be claimed in your Self Assessment tax return within 12 months after the 31st January filing deadline.
Companies have to calculate the number of what’s called “capital expenditures” they want to claim on. They then include all this information on the tax return they submit at the end of the tax year.
Some of the most common capital expenditures include:
Not all capital expenditure qualifies for capital allowances. You, or your company, must own the asset on which the capital allowances are claimed. Meaning, if you’ve hired or leased the asset, you can’t claim for capital allowances on it.
In most cases, you can deduct the full cost of plant and machinery items from your profits before tax using the annual investment allowance. The AIA provides 100% tax relief on these assets, subject to an annual maximum. All other assets must be claimed using a writing down allowance.
The current AIA maximum amount has been temporarily increased from £200,000 to £1 million for expenditure purchased between 1st January 2022 and 31st March 2023. From April 2023, this will go back down to £200,000.
Writing down allowances is when you deduct a percentage of the value of an item from your profits each year. You should use them instead of AIA if:
The percentage you deduct depends on the item, and in most cases, the value is what you paid for it. You should group all your items into separate pools depending on which rate they qualify for. Once you know this, you can work out how much you can claim for each pool and deduct it from your profits on your tax return.
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