Capital Allowance Rates and Annual Investment Allowance

Capital Allowances and annual investment allowance

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. What’s more these ultimately reduce the business tax bill for UK contracting company. 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:

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 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 are owned by your contracting company. 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.

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 these in the UK annual budgets, the last of which was the March 2022 Spring Statement.

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.

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 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. Indeed, 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. 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 main types of Capital Allowance rates which are available

The basic types of Capital Allowances

When we look at UK Capital Allowances and how they work for UK contracting companies, 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). Basically, the FYA is available on certain types of 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). 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. 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). Certainly, 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). What’s more, 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.

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

A 130% Capital Allowances 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).

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/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 Capital Allowances 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.