Tax Glossary

Capital Allowances

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Last updated on:
March 17, 2024

Capital allowances offer a way for businesses to obtain tax relief on tangible capital expenditure by treating it as a business expense. This relief is applicable to purchases made for business operations, such as equipment, vehicles, and research and development costs.

Claiming Capital Allowances

  • Self-employed and Sole Traders: Claims for capital allowances must be included in your Self Assessment tax return within 12 months following the 31st January filing deadline.
  • Companies: Must calculate their capital expenditures to claim and report this on their tax return at the fiscal year's end.

Eligible Expenditures

You can claim capital allowances on various assets, including:

  • Company cars, vans, and other vehicles
  • Computers, printers, and office equipment
  • Tools and machinery
  • Property renovations for business use
  • Research and development costs

However, the asset must be owned by you or your company to qualify. Hired or leased assets are ineligible for capital allowances.

Types of Capital Allowances

  • Annual Investment Allowance (AIA): Allows the full cost deduction of qualifying plant and machinery from your pre-tax profits, subject to an annual limit. The AIA limit was temporarily increased to £1 million for purchases between 1st January 2022 and 31st March 2023, reverting to £200,000 from April 2023.
  • Writing Down Allowance (WDA): Applicable when AIA limits are exceeded or for items not qualifying for AIA (e.g., cars, gifts, or pre-owned items for business use). WDA deducts a percentage of an asset's value from your profits annually.

Assets must be grouped into pools based on their eligibility for certain rates, facilitating the calculation of allowable deductions for each pool, which are then subtracted from your business profits on your tax return.

Strategic Tax Planning with Capital Allowances

Understanding and utilizing capital allowances efficiently can significantly reduce your taxable income, offering substantial tax savings. Proper categorization of expenditures and timely claims are crucial for maximizing these benefits, emphasizing the importance of diligent accounting and tax planning for businesses.

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