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Tax for the self-employed Capital allowances

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Keep a record of what you spend

You get tax relief called annual investment allowance (AIA) or capital allowance on business equipment which you intend to keep, such as vehicles, tools and computers. 

Any equipment such as this that is used in your business counts as a capital asset.

Using the annual investment allowance

For most capital expenditure you will be able to use the AIA. This £50,000 allowance means that 100% of what you spend on equipment up to £50,000 can be offset against your taxable profits (although this does not apply to cars). 

For most small businesses this may be enough, and means that they do not need to use capital allowances at all. 

However, the AIA does not replace all first-year allowances – you will, for example, still also be able to claim tax relief for the whole cost of environmentally beneficial spending.

Top tip

  • Keep a running record of what you spend on capital items, such as cars, and allowances you have already claimed in previous years. You will need them to work out your capital allowances

Over £50,000: capital expenditure regime

For expenditure over £50,000 it will be dealt with in the capital expenditure regime. 

With capital allowances, the general rule is that each year you can claim tax relief on up to 20% of the cost of the capital item (writing down allowance has been reduced from 25% in previous years).

Example

For example, if you bought equipment costing £10,000 above the £50,000 AIA for your business you could claim tax relief on 20% of its cost in the first year – £2,000. 

If you are a basic-rate taxpayer in 2010-11, this could save you £400 (20% x £2,000). That leaves £8,000 of the cost still to be written off, so the next year you could claim tax relief on 20% x £8,000 (£1,600), and so on each year.

Cars get treated slightly differently, and the writing down allowances on most cars is restricted to £3,000. In addition, very low emission cars qualify for 100% first-year capital allowance.


For more information if you're self-employed, see our book Working for Yourself.

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