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Introduction -Capital Allowance rates
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 plant and equipment, vehicles etc and these ultimately reduce the business tax bill. CA includes the Annual Investment Allowance and other types of allowances that a UK business can claim. Notably, a business will go about claiming Capital Allowances (UK) when it prepares its year-end accounts and company tax return. The Capital Allowance rates vary between different types of assets and these can also change from year to year in the government’s annual Budgets or Spring Statements. Therefore, please note:
- A company will claim for these through its Corporation Tax Return.
- A self-employed person will claim for these through their Self-Assessment Tax Return.
However, what is Annual Investment Allowance and how do the allowances work when you run your own company? This article will cover various Capital Allowances advice and we will cover 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, computer equipment as well as Capital Allowance claims other types of business asset.
Initial thoughts -Capital Allowance rates
First, Capital Allowances is an accounting term for allowances that you can claim on your fixed assets. When you purchase an asset this it 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 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.
When you or your accountant perform the calculations and arrive at the allowances you can claim, these will be deducted from your profit. In turn, it will reduce the tax your business needs to pay.
In recent times the Annual Investment Allowance (UK) has been good for limited company contractors and small businesses. Key to note, a Capital Allowances Super Deduction is now available following the pandemic measures.
The UK government sets the rates of Capital Allowances and also the types of Capital Allowances. Please note that they announce any changes to these in the UK annual budgets, the last of which was the March 2022 Spring Statement.
Key to note, when you claim for Capital Allowances (CA) on any capital expenditure incurred 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.
Capital Allowances (UK), how do they work?
Please note that `normal’ business expenses and day-to-day running costs are fully deductible against profit. Key to mention, these expenses must also be `wholly and exclusively’ for business purposes.
Another term that is used for fixed assets is `capital expenditure’. Notably, 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 estimated 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, UK Capital Allowances are deducted and claimed instead, resulting in your profit before tax. Key to note, this taxable profit figure is the amount that is subject to Corporation Tax as a company or income tax if you are self-employed. Notably, when reporting to HM Revenue & Customs (HMRC):
- A company will complete a Corporation Tax return.
- Self-employed people complete an Income Tax return.
In summary, claiming Capital Allowances allows businesses to receive tax relief on business assets. Kindly note that the allowances may also apply over several accounting years, depending on the type of asset that you are claiming these on.
The types of Capital Allowance rates that are available
When we look at UK Capital Allowances and how they work, different types of allowances are available for each type of business asset. To clarify, when claiming Capital Allowances the types of allowance that are currently available to UK businesses are:
- The First Year Allowance (FYA). Please note that the FYA is available on certain types of energy-efficient plant, machinery, and certain cars (electric/hybrid cars up to 50g per km). Kindly note that the allowance is 100% in the year when the business buys the asset.
- Annual Investment Allowance (AIA). Notably, the AIA excludes cars and expenditure that already qualifies for FYA. Previously, the limit was £200,000; however, in January 2019, it was temporarily increased to £1m. The original plan was for the new limit to be in effect from 31 December 2021 until March 2023, thus giving businesses additional time for the increased limit. Update -the expected fall in the Annual Investment Allowance from £1m to £200,000 from April 2023 is no longer going to take place. Instead, the £1m limit for AIA is to be made permanent.
- The Writing Down Allowance (WDA). Please note that the WDA is available for expenditures that do not qualify for AIA or FYA. Moreover, WDA is available for other plants and machinery in a `pool.’ The WDA allowance that applies is 18%.
- Special Rate allowances. Importantly, this allowance 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). Please note that the allowance that applies for SBA is at 3% on a `straight-line’ basis.
What qualifies for annual investment allowance?
Most assets which you purchase for business reasons can be claimed as qualifying expenses for AIA, with the main categories as listed below:
Office equipment which includes computer hardware and some types of software. In addition, office furniture is included.
- Parts of buildings which are referred to as integral features.
- Certain types of fixtures and fittings, such as air conditioning, fitted kitchens, or bathroom fittings.
- Lorries or vans which are used 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 cannot be claimed include buildings, cars, and land. It also includes structures such as bridges or docks, and items which are used only for business entertainment.
Capital Allowance rates -how does annual investment allowance work?
The AIA is a type of Capital Allowance. If your business 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.
Annual Investment Allowance example
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.
A new allowance
The new Super Deduction Capital Allowance was announced during the Budget on 3 March 2021. This new allowance is available from 1 April 2021 until 31 March 2023 and it allows companies who invest in qualifying new plant and machinery assets to claim a Capital Allowances Super Deduction. Let’s clarify further how this works:
- A 130% Capital Allowances Super Deduction on certain qualifying expenditure. These business assets include plant and machinery investments. Please note, when claiming for the Super Deduction, this 130% first-year allowance is claimed in the year of asset purchase. To qualify for the Super Deduction, the expenditure must be on new assets; notably, second-hand assets do not qualify.
- A 50% first-year allowance for qualifying special rate assets.
To sum up, if you are running your own contracting company, previously you were able to claim computer-related equipment and office-related equipment under the Annual Investment Allowance. However now, until 31 March 2023, you can now claim for the Capital Allowances Super Deduction. After 31 March 2023, this will revert to the Annual Investment Allowance again. With this in mind, as the Annual Investment Allowance is currently set at £1 million, UK contractors can receive 100% tax relief against any computer or office equipment their business buys.
If you have a company car, you cannot claim AIA against this.
UK Capital Allowances rates -company cars
Initial thoughts
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 per km or less (or the car is electric).
Cars bought between April 2013 and April 2015
New and unused, CO2 emissions are 95g per km or less (or the car is electric).
Cars bought between April 2015 and April 2018
New and unused, CO2 emissions are 75g per km or less (or the car is electric).
Cars bought from April 2018
New and unused, CO2 emissions are 50g per km or less (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 Capital Allowances available depend on the date you bought the car. Therefore, you can claim WDA under the following bases:
Cars bought between April 2009 and April 2013
New and unused, CO2 emissions are between 110g per km and 160g per km -main rate allowances.
Second-hand, CO2 emissions are 160g/km or less (or the car is electric) -main rate allowances.
New or second-hand, CO2 emissions above 160g per km -special rate allowances.
Cars bought between April 2013 and April 2015
New and unused CO2 emissions are between 95g per km and 130g per km -main rate allowances.
Second-hand, CO2 emissions are 130g per km or less (or the car is electric) -main rate allowances.
New or second-hand, CO2 emissions are above 130g per km -special rate allowances.
Cars bought between April 2015 and April 2018
New and unused, CO2 emissions are between 75g per km and 130g per km -main rate allowances.
Second-hand, CO2 emissions are 130g per km or less (or the car is electric) -main rate allowances.
New or second-hand, CO2 emissions are above 130g per km -special rate allowances.
Cars bought between April 2018 and April 2021
New and unused, CO2 emissions are 50g/km or less (or the car is electric) -first-year allowances.
New and unused, CO2 emissions are 110g/km or less (or the car is electric) -main rate allowances.
Second-hand, CO2 emissions are 110g/km or less (or the car is electric) -main rate allowances.
New or second-hand, CO2 emissions are over 110g/km -special rate allowances.
Cars bought from April 2021
New and unused, CO2 emissions are 0g/km (or the car is electric) -first-year allowances.
New and unused, CO2 emissions are 50g/km or less (or the car is electric) -main rate allowances.
Second-hand, CO2 emissions are 50g/km or less (or the car is electric) -main rate allowances.
New or second-hand, CO2 emissions are over 50g/km -special rate allowances.
In conclusion, when we look at claiming Capital Allowances (UK) and how they work, as you can see, these rules are not easy to follow. Therefore, if you have any questions, please take the time to speak with your accountant.
Calculating capital allowances for Corporation Tax
When we work out Capital Allowances, these are calculated as part of the Corporation Tax computation. Notably, as we look how to calculate Capital Allowances the rates explained earlier are used for each class of asset. The allowances are deducted against taxable profit to reduce the amount of profit that a company is taxed on.
Disposing of business assets
Capital Allowance claims are calculated upon new and existing assets. Please note that 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 Balancing Charge.
Therefore, when a disposal takes place, the business will report the disposal in its accounts and its Corporation Tax / Capital Allowance computations.
Please note that 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 will be a deduction from a business’s taxable profits. On the other hand, a balancing charge will increase taxable profits.
Final thoughts
As a final thought, when we look at Capital Allowances (UK), it is quite a complex area. In addition, the rules around these can also change each year. What’s more, if you have a good accountant who knows what they are doing, you can let them look after all of this for you. As a result, you do not have to worry or think about this. It is important to note that your accountant will work out the Capital Allowances when preparing your company accounts each year. In recent years, the Annual Investment Allowance has allowed many contractors and small business owners to reclaim a 100% tax deduction on purchasing new company equipment.
Finally, it is good for you as a UK contractor to know the available rates. In turn, you can then consider the tax effects for any capital outlay you make in the future. Once again, if you are not sure about this, you should take the time to discuss it with your accountant.
Link to Contractor Advice UK group on
