Tax for the self-employed Self employed capital allowances
If you're running your own business, investment in the tools you need to carry out your work, such as computers or machinery, can qualify for tax relief. These items are known as 'capital assets'.
This relief means that you can effectively lower your income tax bill, and pay less tax on your profits.
There is a limit to how much you can claim. This is known as your 'annual investment allowance' or capital allowance, although there are different rules for people who spend more.
Cars are a form of capital expenditure you can claim for too, although these are treated differently under the capital expenditure regime (see below).
This guide explains how your capital allowances work and how to work out your tax liability using them.
Self-employed: annual investment allowance
For most investments in capital assets for your business, your limit will be under the annual investment allowance (AIA) rules. The rules are as follows:
- The current annual investment allowance is £250,000.
- This is a temporary allowance running between January 2013 and January 2015.
Under these rules, you can spend up to £250,000 on business-related expenses during the relevant period, and offset this spending against your income tax bill. For example:
- You spend £20,000 machinery for your business
- Your taxable profit for the year is £100,000
- You only need to pay tax on £80,000 (£100,000 - £20,000).
The previous annual investment allowance, starting in April 2012, was £25,000 and this is where things can get complicated. The rise in annual investment allowance only applies from 1 January 2013. For the period before this in the 2012/13 tax year, the limit remains £25,000.
If your business has an accounting year which straddles the two periods, the maximum annual investment allowance is calculated in two parts: entitlement based on a £25,000 cap for the months to 1 January 2013 and entitlement based on a £250,000 cap, for the months from 1 January 2013.
If your accounting runs from April 2012 to April 2013, the annual investment allowance will be.
- Nine months (or 9/12ths) x £25,000 = £18,750
- Three months or (3/12ths) x £250,000 = £62,500
- Your total allowance is £81,250.
The rules are really complex and in cases of doubt, you should contact HMRC to confirm details of your entitlement during the transitional period.
Useful link: HMRC guidance on capital allowances - find out what investments qualify on HMRC's website
Self-employed: capital expenditure regime
Expenditure over £250,000 is dealt with not under the annual investment allowance but by the 'capital expenditure regime'.
With capital allowances, the general rule is that each year you can claim tax relief on up to 18% of the cost of the capital item. This is sometimes known as the writing down allowance (WDA).
If you bought equipment costing £10,000 above the £250,000 annual investment allowance for your business you could claim tax relief on 18% of its cost in the first year – £1,800.
So in the 2013/14 tax year, this could save you £324 (18% x £1,800).
That leaves £8,200 of the cost still to be written off, so the next year you could claim tax relief on 18% x £8,200 (£1,476), and so on each year.
Cars are treated under these rules, rather than counting towards your AIA. If the car has carbon emissions below a certain threshold, you will be able to claim 100% of the cost, under a 'first year allowance'. If the emissions are above the threshold you will be able to claim 18% of the cost per year.
If the vehicle is used exclusively for business, the whole cost is taken into account. If it is partially used for private mileage, the eligible sum is reduced pro rata.