Capital Allowance rates and the annual investment allowance

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Table of Contents

Introduction 

What are UK Capital Allowances, and how do they affect a UK contractor? When we consider what Capital Allowance (CA) is, they’re allowances that businesses can claim against business assets, such as Capital Allowances on plant and machinery, vehicles, etc. What’s more, these ultimately reduce the business tax bill for UK contracting companies. Capital Allowance rates include the Annual Investment Allowance and other types of allowance a UK business can claim. Indeed, a business will go about claiming Capital Allowances (UK) when it prepares its year-end accounts and company tax return. However, each type of asset can have different rates for Capital Allowances. In addition, the types of Capital Allowances can change yearly in the government’s annual Budgets or Spring Statements. Therefore:

  • A company will make a Capital Allowances claim through its Corporation Tax Return for each financial year.
  • A sole trader who works via self-employment will claim self-employed Capital Allowances through their Self-Assessment Tax Return for each tax year.

However, what is the Annual Investment Allowance, and how do the allowances work when you run your own company? This guide will look at Capital Allowances in the UK and help you understand Capital Allowances. We cover various contractor Capital Allowances advice, including new Capital Allowance rates. Moreover, we’ll explain how these work for different types of assets and which rates are available for each asset class. This will include Capital Allowances on cars, Capital Allowances on computers and other computer equipment, and Capital Allowance claims on different types of business assets.

Initial thoughts on Capital Allowances Rates 

First thoughts

First, Capital Allowance is an accounting term for allowances you can claim on fixed assets your contracting company owns. When you purchase an asset such as a computer, it isn’t fully deductible against tax. This is because, unlike expenses, it has a lifespan of several years. Therefore, you can make a contractor Capital Allowance claim for each asset, and we’ll explain how these work as we go on.

The fixed assets in your business are known as tangible assets. You can claim Capital Allowances on tangible assets. Each type of asset may have a different Capital Allowance rate. Therefore, these may include:

  • Plant & machinery.
  • Motor vehicles.
  • Computer equipment.
  • Office equipment.

What is a basic Capital Allowances computation?

In your small business Capital Allowance computation, you or your accountant can perform the Capital Allowance calculation for each type of asset. As a result, in the Capital Allowances calculation, you’ll arrive at the total allowances you can claim. Next, we deduct these from your company’s taxable profit to arrive at a new lower taxable profit. That’ll reduce the company’s profit before the business must pay tax.

Recent times

The Annual Investment Allowance (UK) has recently been good for limited company contractors and small businesses. Indeed, a Capital Allowances Super Deduction was available up to 31 March 2023, and now a `Full Expensing’ allowance is available from 1 April 2023.

The UK government sets the rates and types of Capital Allowances and announces any changes in the annual budgets. The last ones were the November 2023 Autumn Statement and the March 2024 Budget.

Claiming for CA on any capital expenditure you incur during the accounting period will help reduce your limited company profit subject to Corporation Tax (CT). As a result, the CA allowances help to reduce your company’s annual Corporation Tax charge.

Common questions

As a UK contractor or small business owner, you may question how CA works. These will include how to work them out and how they affect your company tax bill. Therefore, examples of such questions could include:

  • How do Capital Allowances work?
  • Who can claim Capital Allowances?
  • What are Capital Allowances (UK)?
  • How much Capital Allowance can I claim?
  • What Capital Allowances can I claim?
  • How to calculate Capital Allowance?
  • How to work out Capital Allowances?
  • What is First Year Allowance?
  • What is the Annual Investment Allowance?
  • Can you claim AIA on second-hand vans?
  • Can you claim AIA on second-hand assets?

In this guide, we’ll look at the above in more detail. Moreover, we’ll discover how Capital Allowances for IT contractors (and contractors in other industries) work in the UK. We’ll research the current CA rates and discover which allowance each type of asset falls under.

How do Capital Allowances (UK) work? 

As a UK contractor, your `normal’ business expenses and day-to-day running costs are fully deductible against profit. Moreover, these expenses must be `wholly and exclusively’ for business purposes.

Another term we use for fixed assets is `capital expenditure’. Assets have a value, and they’ll show within the Balance Sheet in your company accounts. Furthermore, a depreciation charge will apply to fixed assets in the company accounts. In turn, this will reduce your company’s profits. Therefore, depreciation is the estimate of asset value loss for the year in question. In addition, it’ll reduce the fixed asset value on the Balance Sheet.

In your business tax computations, depreciation isn’t an allowable expense. Therefore, we add this back onto the profit. Next, we claim and deduct the CA, resulting in your profit before tax. Indeed, this taxable profit figure is subject to Corporation Tax as a company or Income Tax if you’re in self-employment. When reporting to HM Revenue & Customs (HMRC):

  • A company will complete a Corporation Tax return.
  • People working via self-employment complete an Income Tax return.

In summary, claiming Capital Allowances allows businesses to receive tax relief on their assets. Depending on the type of asset, the allowances may apply over several accounting years.

Basic types of Capital Allowance (UK) & Capital Allowances explained 

Main types of Capital Allowance rates 

Introduction to UK Capital Allowances 

When we look at CA and how they work for UK contracting companies, we see that different types of allowances and rates are available for each type of business asset. Therefore, a Capital Allowances overview is shown below, which you can refer to when claiming Capital Allowances.

What types of Capital Allowances are available?

Types of allowances currently available to businesses are:

  • First Year Allowance (FYA). First year Capital Allowances are available on certain plant and machinery and other assets. Therefore, you can claim First Year Allowances on energy-efficient plant, machinery, and certain cars (electric/hybrid cars up to 50g per km). Furthermore, the allowance is 100% in the year when the business buys the asset.
  • Annual Investment Allowance (AIA). AIA Capital Allowances exclude cars and expenditures that already qualify for FYA. Previously, the Capital Allowances AIA allowance limit was £200,000. In January 2019, it temporarily increased to £1m. Initially, the new Annual Investment Allowance (Capital Allowances) limit was to run from 31 December 2021 until March 2023. The £1m AIA limit now runs until 31 March 2025.
  • The Writing Down Allowance (WDA). The WDA tax allowance is available for expenditures not qualifying for AIA or FYA and for other plant and machinery in a main rate pool. In other words, certain assets fall into the main pool Capital Allowances when they don’t qualify for AIA or FYA. The WDA allowance that applies is 18%.
  • Special Rate allowances. These are long-life asset Capital Allowances. Therefore, this Capital Allowance rate is available for long-life assets and integral features of buildings and cars over 110g per km (CO2). The Special Rate allowance is 6% (previously 8%).
  • The Structures and Buildings Allowance (SBA). The Capital Allowance rate for SBA is 3% on a `straight-line’ basis.

A small pools allowance is available, which enables you to claim the full balance of the main or special rate pool when this is £1,000 or less.

HS252 Capital Allowances and Balancing Charges 2023 contains detailed HMRC guidance. There are more details within HMRC’s CA Toolkit document.

What qualifies for the Annual Investment Allowance? 

The qualifying criteria 

Most assets that you purchase for business reasons qualify for AIA. The main categories are shown below:

  • Office equipment, which includes computer hardware and some types of software. In addition, this includes office furniture.
  • Parts of buildings which we refer to as integral features.
  • Certain fixtures and fittings, such as air conditioning, fitted kitchens, or bathroom fittings.
  • Lorries or vans, which a business uses for moving purposes.
  • Machinery which is used for business purposes.
  • Agricultural machinery, which includes tractors.
  • Machines used for providing entertainment, such as arcade game machines.

The types of assets on which you can’t claim AIA include:

  • Business cars.
  • Items you owned for another reason before using them in your business.
  • Items which are given to you or your business.

For the items above, since you cannot claim AIA, you’ll claim Writing Down Allowances instead.

Second-hand assets

It’s often asked if you can claim AIA on second-hand assets. If they meet the qualifying criteria above, you can claim the Annual Investment Allowance on second-hand assets.

As shown in the list above, it’s not possible to claim AIA for an asset you owned or used for another reason (such as personal use) before your business bought it. This includes assets you introduce when starting a new business, such as a computer. In addition, no AIA is available for assets you introduce from `connected parties’ or `related parties.’ When you cannot claim AIA, you’ll claim WDA instead.

Capital Allowance rates & how does Annual Investment Allowance work? 

The AIA is a type of Capital Allowance for UK businesses. Suppose your company purchases a piece of equipment that qualifies for the AIA. In that case, you’ll be claiming Capital Allowances of 100% on the cost of this asset from your business’s taxable profit before you calculate how much tax is due on the business profit.

If a person controls two or more limited companies, the businesses only get one AIA between them. Furthermore, they can choose how they share the AIA.

Annual Investment Allowance example 

In this Capital Allowance example for AIA, Peter is a limited company contractor whose year-end is 31 December 2024. During the year, his company purchases a new computer with various equipment costing £1,800. As it’s within the annual limit, the cost of the computer is fully deductible against his company’s taxable profit. Therefore, his contractor limited company will make a company tax saving of £1,800 x 19% = £342. 

The Super Deduction

A Capital Allowance called the Super Deduction was announced during the Budget on 3 March 2021. This allowance was available from 1 April 2021 until 31 March 2023, and it allowed companies who invested in qualifying new plant and machinery assets to claim a CA Super Deduction. It had two components, and this is how it worked:

  • A 130% Super Deduction on certain qualifying expenditures. These business assets included plant and machinery investments. As a result, the 130% first-year allowance was claimed in the year of asset purchase when claiming for the Super Deduction. To qualify for the Super Deduction, the expenditure must’ve been on new assets; notably, second-hand assets did not qualify.
  • A 50% first-year allowance for qualifying special rate assets. 

Full Expensing 

It was announced in the March 2023 Budget that from 2023/24, there’ll now be `Full Expensing’. Once again, there are two components:

  • The new allowance will allow a business to claim the cost of assets it buys against company profit. This offers 100% first-year relief to companies on qualifying new main rate plant and machinery investments (including a computer) from 1 April 2023 until 31 March 2026. However, to qualify for the new allowance, the equipment should be new and unused; it doesn’t include cars and is only available to companies. Therefore, you can claim the AIA instead if you buy a second-hand computer.
  • Similar to the Super Deduction allowance, a 50% first-year allowance for other plant and machinery and long-life assets with integral features (known as special rate assets).

Although the original plan was for the above to run until 31 March 2026, the government has announced that both allowances will be permanent.

Capital Allowances on vans 

How do you confirm a vehicle’s status?

When you plan to buy a van, the first thing to do is confirm it’s a van. This sounds obvious; however, you must ensure it’s classed as a van for UK tax purposes. When choosing a van, the dealer should be able to confirm if it is for tax purposes. However, if you’re still unsure, HMRC has a list of vehicles it classifies as vans or cars.

Capital allowances (vans)

Buying a van for your company is classified as ‘plant and machinery’ for Corporation Tax purposes. Therefore, when you claim a Capital Allowance on vans, these fall under the same allowances allowed for plant and machinery. Key to note: Full Expensing replaced the Super Deduction on 1 April 2023. Therefore, can we claim Full Expensing or AIA on vans? Full Expensing applies to new and unused assets and is only available to companies. Thus, the Full Expensing allowance will apply to new vans bought by a company from 1 April 2023. However, what can you claim as Capital Allowances on second-hand vans? Because they don’t qualify for Full Expensing but are classed as plant and machinery, you can claim the Annual Investment Allowance on second-hand vans.

What’s the tax savings?

The results of the above claims on vans as qualifying plant and machinery are:

  • Full Expensing on new company vans -your business will save 100% of the new van cost against tax.
  • AIA on second-hand vans: If your company makes profits of £50,000 or less, it’ll save 19% of the van cost against tax. If your company makes profits over £50,000 or more, it’ll save at the Corporation Tax rate of 26% or 25% of the van cost against tax.

Summary

In summary, it’s good that vans fall under the plant and machinery classification (cars don’t). However, you can claim 100% against tax for the latest electric models. Please read on to find out more.

UK Capital Allowances rates for company cars 

We now look at how to calculate Capital Allowance for motor vehicles for a business. The Capital Allowances for cars are a little more complex, and the type of CA depends on when the car was bought. In addition, the rate of Capital Allowance for cars depends on whether they’re electric or conventional vehicles. If a vehicle is a petrol, diesel, or indeed hybrid, the Capital Allowances rate depends on what level of CO2 emissions it emits. 

Initial thoughts on Capital Allowances for cars

Under Capital Allowances (UK) rules, you can claim one of the following in respect of car Capital Allowances:

  • The total value of the car in the year of purchase.
  • 18% of the car’s value (main rate pool allowances).
  • 6% of the car’s value (special rate pool allowances). 

Capital Allowance rates -how First-Year Allowances work 

If your car is an energy-efficient vehicle such as an electric or hybrid car, you can claim FYA under the following bases:

Cars bought between April 2009 and April 2013 

The car is new and unused; its CO2 emissions are 110g/km or less, or it is electric.

Cars bought between April 2013 and April 2015 

The car is new and unused; its CO2 emissions are 95g/km or less, or it is electric.

Cars bought between April 2015 and April 2018 

The car is new and unused; its CO2 emissions are 75g/km or less, or it is electric.

Cars bought between April 2018 & April 2021 

The car is new and unused; its CO2 emissions are 50g/km or less, or it is electric.

Cars bought from April 2021 

The car is new and unused; its CO2 emissions are 0g/km, or it is electric. 

When we look at Capital Allowances and how they work, the rate of tax you pay depends on the CO2 emissions of your company car if it isn’t energy-efficient.

Capital Allowance rates -how Writing Down Allowances work 

The CA available depends on the date you bought the car. Therefore, you can claim WDA under the following bases:

Cars bought before April 2009 

You should move the balance of any cars bought before April 2009 to your main rate allowances pool when you work out how much you can claim.

If your car doesn’t have an emissions figure:

  • Use the special rate.
  • Use the main rate if it was registered before 1 March 2001.

Cars bought between April 2009 and April 2013 

The car is new and unused; its CO2 emissions are 110g/km or less, or it is electric -100% first-year allowances.

Second-hand electric car -main rate allowances.

New or second-hand, CO2 emissions are 160g/km or less -main rate allowances.

New or second-hand, CO2 emissions are over 160g/km -special rate allowances.

Cars bought between April 2013 and April 2015 

The car is new and unused; its CO2 emissions are 95g/km or less, or it is electric -100% first-year allowances.

Second-hand electric car -main rate allowances.

New or second-hand, CO2 emissions are 130g/km or less -main rate allowances.

New or second-hand, CO2 emissions are over 130g/km -special rate allowances.

Cars bought between April 2015 and April 2018 

The car is new and unused; its CO2 emissions are 75g/km or less, or it is electric -100% first-year allowances.

Second-hand electric car -main rate allowances.

New or second-hand, CO2 emissions are 130g/km or less -main rate allowances.

New or second-hand, CO2 emissions are over 130g/km -special rate allowances.

Cars bought between April 2018 and April 2021 

The car is new and unused; its CO2 emissions are 50g/km or less, or it is electric -100% first-year allowances.

Second-hand electric car -main rate allowances.

New or second-hand, CO2 emissions are 110g/km or less -main rate allowances.

New or second-hand, CO2 emissions are over 110g/km -special rate allowances.

Cars bought from April 2021 

The car is new and unused; its CO2 emissions are 0g/km, or it is electric -100% first-year allowances.

Second-hand electric car -main rate allowances.

New or second-hand, CO2 emissions are 50g/km or less -main rate allowances.

New or second-hand, CO2 emissions are over 50g/km -special rate allowances.

Other thoughts on UK business Capital Allowances

UK contractor companies summary

To sum up, if you’re running your own contracting company, you could previously claim AIA on computer-related and office-related equipment. However, up to 31 March 2023, you could claim for the CA Super Deduction. From 1 April 2023, you can now claim for `Full Expensing’. With this in mind, and as the AIA is currently set at £1 million, UK contractors will more than likely receive 100% tax relief against any computer or office equipment their business buys.

Calculating Capital Allowances for Corporation Tax

When we calculate Capital Allowances, we do so as part of the Corporation Tax computation. Indeed, when calculating capital allowances, we see that the types of CA we showed earlier are used for each asset class. As a result, we deduct the allowances against taxable profit to reduce the amount of profit a company is taxed on.

What happens when you dispose of business assets?

Capital Allowance claims are calculated based on new and existing assets. Therefore, when a business disposes of an asset, it can usually claim a Balancing Allowance on any remaining value after allowing for the sale proceeds. Alternatively, if the sale proceeds are more than the remaining value of the asset, the business will pay a Capital Allowances Balancing Charge on disposal of the asset.

Therefore, when a disposal occurs, the business will report it in its accounts and Corporation Tax/Capital Allowance computations.

Two examples of the above are:

Example 1 Example 2
Remaining value 2000 2000
Sale proceeds 1500 2700
Balancing allowance (charge) 500 (700)

The balancing allowance is a deduction from a business’s taxable profits. On the other hand, a balancing charge will increase taxable profits.

Final thoughts 

Finally, it’s a pretty complex area when we look at claiming Capital Allowances (UK) and discovering how they work for your UK contracting company. In addition, the rules around each type of asset allowance can change each year. Moreover, if you have a good contractor accountant who knows what they’re doing, you can let them look after this for you. As a result, you don’t have to worry or think about this. It’s important to remember that your accountant will work out the Capital Allowances when preparing your company accounts each year. The Annual Investment Allowance has recently allowed many contractors and small business owners to reclaim a 100% tax deduction on purchasing new company equipment.

Published On: April 6th, 2024 / Categories: Accounting /

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