Capital Allowance Rates 2023: Discover limited company rates

Capital Allowance rates and the annual investment allowance

Table of Contents

Introduction

What are UK Capital Allowances and how do they affect a UK contractor? When we consider what is Capital Allowance (CA), these are 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 company. Capital Allowance rates include the Annual Investment Allowance and other types of allowances that a UK business can claim. Basically, a business will go about claiming Capital Allowances (UK) when it prepares its year-end accounts and company tax return. However, there can be different rates for Capital Allowances for each type of asset. In addition, the types of Capital Allowance rate and allowance can change from year to year 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 is is a person working via self-employment, will claim for self-employed Capital Allowances through their Self-Assessment Tax Return for each tax year.

However, what is 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 in understanding Capital Allowances. We cover various contractor Capital Allowances advice and this includes any new Capital Allowance rates. What’s more, we’ll also explain how these work for different types of assets as well as which rates are available for each class of asset. This will include Capital Allowances on cars, Capital Allowances on computers and other computer equipment as well as Capital Allowance claims on other types of business asset.

Initial thoughts on Capital Allowance rates

What to think about first

First, Capital Allowances is an accounting term for allowances that you can claim on fixed assets which your contracting company owns. When you purchase an asset, this is not fully deductible against tax like expenses and this is because it has a lifespan of several years. Therefore, you are able to make a contractor Capital Allowance claim in respect of each asset and we will explain how these work as we go on.

The fixed assets in your business are known as tangible assets and it is fixed assets upon which you can claim Capital Allowances. Each asset will usually have a different Capital Allowance rate. Therefore, these may include:

Plant & machinery.

Motor vehicles.

Computer equipment.

Office equipment.

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 of this, 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 new lower taxable profit. In turn, this will reduce the company tax which your business needs to pay.

Recent times

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

The UK government sets the rates of Capital Allowances and also the types of Capital Allowances. Basically, they announce any changes to the Capital Allowance rates in the UK annual budgets, the last of which was the March 2023 Spring Statement.

When you claim for CA on any capital expenditure you incur during the accounting period, this 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 have questions around 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 Annual Investment Allowance?

Can you claim AIA on second hand vans?

Can you claim AIA on second hand assets?

In this guide, we’ll take a look at the above in more detail. What’s more, we’ll discover how Capital Allowances for IT contractors (and contractors in other industries) work in the UK. We’ll research the current Capital Allowance 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. What’s more, these expenses must also be `wholly and exclusively’ for business purposes.

Another term which we use for fixed assets is `capital expenditure’. Basically, assets have a value, and they will show in 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 will reduce the fixed asset value that is on the Balance Sheet.

In your business tax computations, depreciation is not an allowable expense. Therefore, we add this back on to the profit. Next, we claim and deduct the CA, resulting in your profit before tax. Indeed, this taxable profit figure is the amount that is subject to Corporation Tax as a company or income tax if you are in self-employment. Basically, 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 business assets. What’s more, the allowances may also apply over several accounting years, depending on the type of asset that you are claiming these on.

The basic types of Capital Allowance (UK) and Capital Allowances explained

The main types of Capital Allowance rates which are available in the UK

Introduction to UK Capital Allowances

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

Types of Capital Allowances

The types of allowance that are currently available to UK businesses are:

The First Year Allowance (FYA). Basically, first year Capital Allowances are available on certain types of 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). Basically, AIA Capital Allowances exclude cars and expenditure that already qualifies for FYA. Previously, the limit for the Capital Allowances AIA allowance was £200,000; however, in January 2019, it was temporarily increased to £1m. The original plan was for the new Annual Investment Allowance (Capital Allowances) limit to be in effect from 31 December 2021 until March 2023, thus giving businesses additional time for the increased limit. However, it was decided that the expected fall in April 2023 back to £200,000 would not take place and instead, the £1m limit for AIA is to be made permanent.

The Writing Down Allowance (WDA). Basically, the WDA tax allowance is available for expenditures which do not qualify for AIA or FYA. What’s more, WDA is available for other plants and machinery that are kept in a `pool.’ In other words, certain assets fall into main pool Capital Allowances when they do not 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, integral features of buildings and cars over 110g per km (CO2). The Special Rate allowance is 6% (previously, this was 8%).

The Structures and Buildings Allowance (SBA). What’s more, the Capital Allowance rate which applies for SBA is at 3% on a `straight-line’ basis.

What qualifies for annual investment allowance?

Qualifying criteria

Most assets which you purchase for business reasons will be qualifying expenses 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 types of 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 which are used for providing entertainment, such as arcade game machines.

The types of assets which you cannot claim AIA on include:

Business cars.

Items which you owned for another reason before you started using them in your business.

Items which are given to you or your business.

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

Second hand assets

It is often also asked; can you claim AIA on second hand assets? The answer here is you can claim the Annual Investment Allowance on second hand assets, if they meet the qualifying criteria above.

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

Capital Allowance rates -how does annual investment allowance work?

The AIA is a type of Capital Allowance for UK business. If your company purchases a piece of equipment that qualifies for the AIA, you will 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 2 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 and his year-end is 31 December 2022. During the year his company purchases a new computer with various equipment costing £1,800. As this is 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

The Super Deduction Capital Allowance 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. Basically, it had two components and this is how it worked:

A 130% Super Deduction on certain qualifying expenditure. These business assets included plant and machinery investments. As a result, when claiming for the Super Deduction, this 130% first-year allowance was claimed in the year of asset purchase. To qualify for the Super Deduction, the expenditure must have 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 will now be `Full Expensing’. Once again, there are two components:

The new allowance will allow a business to claim the cost of assets that it buys against company profit. Basically, the allowance offers 100% first-year relief to companies on qualifying new main rate plant and machinery investments (this will include a computer) from 1 April 2023 until 31 March 2026. However, to qualify for the new allowance the equipment needs to be new and unused, it does not include cars and it is only available for companies. Therefore, if you buy a second-hand computer, you can claim the AIA instead.

Along similar lines 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).

Capital Allowances on vans

Confirm the vehicle status

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

Capital allowances (vans)

When you buy a van for your company, this 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 that are 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. Therefore, the Ful 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 do not qualify for Full Expensing but are classed as plant and machinery, you can claim the Annual Investment Allowance on vans which are bought second hand.

Tax savings

The results of the above claims 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 will save 19% of the van cost against tax. If your company makes profits over £50,000 or more, it will save 26% or 25% of the van cost against tax.

Summary

In summary, it is good that vans fall under the plant and machinery classification. Key to note, cars do not however you can claim 100% against tax for the latest electric type models. Please read on to find out more.

UK Capital Allowances rates -company cars

We now take the time to look at how to calculate Capital Allowance for motor vehicle 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 for Capital Allowance on cars depend on whether they are electric or conventional vehicles. Therefore, if a vehicle is petrol or diesel or indeed hybrid, the Capital Allowances rate depends on what level of CO2 emissions they emit.

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

New and unused, CO2 emissions are 110g/km or less (or the car is electric).

Cars bought between April 2013 and April 2015

New and unused, CO2 emissions are 95g/km or less (or the car is electric).

Cars bought between April 2015 and April 2018

New and unused, CO2 emissions are 75g/km or less (or the car is electric).

Cars bought between April 2018 and April 2021

New and unused, CO2 emissions are 50g/km or less (or the car is electric).

Cars bought from April 2021

New and unused, CO2 emissions are 0g/km (or the car is electric).

When we look at Capital Allowances and how they work, the rate you can claim depends on the CO2 emissions if your company car is not an energy-efficient vehicle.

Capital Allowance rates -how Writing Down Allowances work

The CA available depend 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 does not 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

New and unused, CO2 emissions are 110g/km or less (or the car is electric) -100% first-year allowances.