What is a capital allowance?
If you're running your own business, the investment you make 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', and are taxed differently to other tax-deductible expenses.
This relief means that you can effectively pay less tax, as the amount you’ve had to spend on these ‘capital assets’ is taken into account, as the money spent will effectively mean you’ve made less of a profit – and that’s what you’re taxed on.
There is a limit to how much you can claim. This is known as your capital allowance or 'annual investment allowance'.
Cars are also a form of capital expenditure that you can claim for, although these are treated differently - more on that below.
- Get a head start on your 2020-21 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
How much is the self-employed annual investment allowance?
For most investments in capital assets you make for your business, your limit will be determined by the annual investment allowance (AIA) rules.
- The annual investment allowance for sole traders, partners and limited companies has been temporarily increased to £1m until December 2021
- This is applied to the portion of a company's tax period before 1 January 2022
- The AIA is £200,000 for the portion of the tax period on or after 1 January 2022
Under these rules, you can spend 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 minus £20,000).
Self-employed: writing down allowances
The 'writing down allowance' can be used if you've spent more than your annual investment allowance limit on capital assets, or if the item doesn't qualify for AIA (eg. cars, gifts or items you already owned before you started using them in your business).
It works by allowing you to deduct a percentage of the value from your profit each year, giving you some tax relief.
This percentage depends on the item.
How to claim writing down allowances
- Work out the value of the item - usually what you paid for it. If it was a gift or you already owned it, use the market value.
- Group things you've bought into 'pools' based on the percentage rate they qualify for - the main rate pool gets 18%; the special rate pool gets 6%; single asset pools vary between the two depending on the item.
- The amount left in each pool becomes the starting balance for the next accounting period.
Writing down allowances: an example
You bought equipment for your business costing £210,000 – that’s £10,000 above the £200,000 annual investment allowance (outside of the temporary increase).
It qualifies for the main rate pool, so you can claim tax relief on 18% of its cost in the first year – in this case, 18% is £1,800.
So in the 2022-21 tax year, this could save you £360 (20% basic rate tax on £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.
- Find out more: Small business tax: what you need to pay - if you're a small business owner, there are other taxes you'll need to think about. This guide lists them all.
Using capital allowances for business cars
Business cars are also treated under these rules, separate to your AIA.
There are three different allowances you can claim when you buy a car for business purposes.
The year the car was bought, and whether it is new or second hand also have a bearing on the allowances you can claim.
- First-year allowances - applies to some vehicle with low CO2 emissions. You'll be able to claim 100% of the cost.
- Main rate allowances - applies to most vehicles. You'll be able to claim 18% of the costs.
- Special rate allowances - applies to vehicles with CO2 emissions above 50g/km. You'll be able to claim 6% of the cost.
Rates for cars
You can use the arrows in the table below to scroll to find the regulations that apply to you, based on when the car was bought.
|Car type||What you can claim|
|New and unused, CO2 emissions 0g/km or less, or car is electric||First-year allowances|
|New and unused, CO2 emissions between 1g/km and 50g/km||Main rate allowances|
|Second hand, CO2 emissions between 1g/km and 50g/km, or car is electric||Main rate allowances|
|New or second hand, CO2 emissions above 50g/km||Special rate allowances|
Submit your 2020-21 tax return with Which?
Get a head start on your 2020-21 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.