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When it comes to your tax bill there are certain expenses which must be classed as a Capital allowance rather than a tax deductible business expense. HMRC will allow you to deduct some or all of the value of an item from your profits before you pay tax. In particular the expenses which fall into this category are usually tangible assets that are used in your daily business operations, things such as machinery, vehicles, builds and equipment
The reason these assets are classed as capital allowances is because they depreciate over time. The amount you deduct from your tax will be a reflection of the age of the asset and how much it has depreciated over time.
If you’re a Sole Trader or partnership with an income of £150,000 or less then you can use cash basis accounting instead of capital allowances.
Capital allowances for plant and machinery
Annual Investment Allowance (AIA) –
You can deduct the full value of an item which qualifies for AIA up to the value of £1m providing you purchased it during the time you have owned your business and not before.
100% first year allowances –
If you buy an asset that qualifies for 100% first year allowances you can deduct the full cost from your profits to reduce your tax bill. In order to qualify the asset must be;
– An electric car or a car with zero emissions
– Equipment for electrical vehicle charging points
– Zero emissions good vehicles
– Gas refuelling equipment
– Plant and machinery for gas refuelling stations
– Plant and machinery for us in a freeport tax site
Super Deduction or 50% special rate first year allowance
For brand new plant and machinery purchased between 1st April 2021 until 31st March 2023 the super deduction allows you to deduct up to 130% of the cost from your profits before tax. Whereas the 50% special rate first year allowance allows you to deduct 50% of the cost.
Writing Down Allowances
If your plant and machinery doesn’t qualify for AIA or you’ve already claimed the maximum amount of £1m then you can claim writing down allowances which allows you to deduct a percentage from your profits before tax.
There are 3 different rates;
– Main pool 18%
– Single rate pool 6%
– Single assets pool 18% or 6% depending on the item
You can find out more about the rates and what’s applicable to you here:
