An Introduction to Capital Allowances
As a small business owner in the UK, it's important to take advantage of every tax break available to you. One such tax break is capital allowances, which allow you to claim tax relief on certain assets that you purchase for your business. In this post, we'll explain what capital allowances are, the different types of capital allowances available, and how to claim them.
What are Capital Allowances?
Capital allowances are a form of tax relief that allows businesses to claim a deduction for the cost of certain assets that they purchase. These assets are typically used in the business and are expected to last for more than a year. Capital allowances are available for a wide range of assets, including machinery, vehicles, and computers.
It's important to note that capital allowances are different from expenses. Expenses are costs that are incurred in the course of running the business and are deducted from revenue to determine taxable profits. Capital allowances, on the other hand, are claimed on the cost of assets that the business purchases.
Types of Capital Allowances Available
There are several different types of capital allowances available to small businesses in the UK. Here are some of the most common:
Annual Investment Allowance (AIA): The AIA is a type of capital allowance that allows businesses to deduct the full cost of qualifying assets from their profits before tax. The AIA is currently set at £1 million per year and is available to most businesses.
First-Year Allowances (FYA): FYAs allow businesses to claim a higher rate of capital allowance in the first year of purchase for certain assets. For example, businesses can claim a 100% FYA on the cost of new electric vehicles.
Writing Down Allowances (WDA): WDAs allow businesses to claim tax relief on the value of assets that they still own after they have claimed the AIA and, FYAs. The WDA rate is currently set at 18% for most assets. However, for certain assets including cars with CO2 emissions above 50g/km, this is reduced to 6%
Claiming Capital Allowances
To claim capital allowances, businesses need to keep records of the assets they purchase and the cost of those assets. Businesses can then claim the capital allowance on their tax return. The amount of the claim will depend on the type of asset and the amount spent on the asset.
For example, if a business purchases a new computer for £1,000, it can claim the total amount of the purchase as a capital allowance under the AIA. You don’t need to claim the entire amount in AIA, though. You can claim less, or nothing at all and use your WDA to claim the cost or the remaining cost over a period of time.
It’s these complications that mean that it’s often better getting professional advice as it can save you a lot of money.
Recent Changes to Capital Allowances
It's important to stay up-to-date with any changes to capital allowances in the UK. One recent change was an increase in the AIA from £200,000 to £1 million per year. This change was made in January 2019 as a temporary increase but has now been made permanent.
Conclusion
Capital allowances are a valuable tax break for small businesses in the UK. By claiming capital allowances, businesses can reduce their tax bill and invest more money back into their business. If you're a small business owner in the UK, it's important to understand the different types of capital allowances available and how to claim them. Keep records of your assets and consult with a tax professional to ensure that you're taking full advantage of this tax break.
Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.