When a self-employed business purchases long-term assets, such as equipment, machinery, or vehicles, the cost is not typically treated as a standard day-to-day expense. Instead, tax relief is given through a system called Capital Allowances. This system allows the business to deduct a portion, or in some cases all, of the asset’s cost from its profits before tax is calculated. This is a crucial mechanism for reducing tax liability, particularly for businesses that require significant investment in physical assets.
The Annual Investment Allowance (AIA): 100% Relief in Year One
The most widely used and generous form of capital allowance is the Annual Investment Allowance (AIA). HMRC guidance states that AIA allows a business to “deduct the full value of an item that qualifies… from your profits before tax” in the year of purchase. It is, in effect, a 100% first-year allowance, providing immediate and full tax relief on qualifying expenditure.
The AIA limit has been permanently set at a substantial £1 million per year, a threshold that covers the annual asset expenditure of the vast majority of sole traders and small businesses. The allowance can be claimed on most items of “plant and machinery,” a broad category that includes :
- Tools and manufacturing equipment
- Computers, office furniture, and other office equipment
- Vans, lorries, and other commercial vehicles
- Integral features in business premises, such as heating or electrical systems
It is critical to note the specific exclusions from AIA. HMRC rules are explicit that you cannot claim AIA on business cars. Additionally, items that were owned for personal use before being brought into the business, or items that were gifted to the business, do not qualify for AIA and must be claimed under the Writing Down Allowance system instead.
While the immediate 100% tax relief is a powerful incentive, taxpayers are not obligated to claim the full amount. HMRC guidance allows a taxpayer to claim only part of the AIA and use the slower Writing Down Allowances for the remainder of the cost. This flexibility is a key strategic tool. For example, if a business has low profits in a particular year, claiming a large AIA deduction could be wasteful if it reduces profits to a level below the tax-free Personal Allowance. In such a scenario, it is more tax-efficient to claim only enough AIA to reduce profits to the desired level (e.g., to the top of the basic rate band, or to zero) and carry the remaining asset cost forward to be relieved against profits in future, potentially more profitable, years. This transforms the AIA from a simple annual deduction into a tool for multi-year tax planning.
Writing Down Allowances (WDA): Tax Relief Over Time
For expenditure that either exceeds the £1 million AIA limit or is on an asset that does not qualify for AIA (most notably, business cars), tax relief is given through Writing Down Allowances (WDA). Instead of a 100% deduction in the first year, WDA provides relief by allowing a business to deduct a percentage of the asset’s value from its profits each year.
Assets qualifying for WDA are grouped into “pools.” The value of these pools is reduced each year by the allowance claimed. The current WDA rates are :
- 18% for the main rate pool: This covers most plant and machinery.
- 6% for the special rate pool: This includes long-life assets and integral features of buildings, such as air conditioning or lighting systems.
Business cars are the most common asset for which self-employed individuals must use the WDA system. The specific rate is determined by the car’s CO2 emissions. For the 2025/26 tax year, cars with emissions up to 50 g/km are placed in the 18% main rate pool, while those with emissions over 50 g/km fall into the 6% special rate pool. New electric cars with zero emissions may qualify for a more generous 100% first-year allowance.
A crucial rule for WDA is the treatment of private use. If an asset, such as a car, is used for both business and personal journeys, the capital allowance claim must be reduced by the proportion of private use. For example, if a car is used 60% for business and 40% for private travel, only 60% of the calculated WDA can be deducted from business profits.
The capital allowances system also accounts for the disposal of assets. When an asset from a WDA pool is sold, the proceeds (up to the asset’s original cost) are deducted from the value of the pool. If this results in a negative balance in the pool, a “balancing charge” is created, which is added to the business’s taxable profits for that year. This effectively claws back excess relief given in previous years. Conversely, if a business ceases trading and a positive balance remains in the pool after all assets have been sold, a “balancing allowance” is given as a final tax deduction. This demonstrates that the entire lifecycle of an asset, from purchase to disposal, has tax implications that must be tracked.
How to Claim Capital Allowances on Your Self Assessment Return
For sole traders, capital allowances are claimed within the self-employment (SA103) supplementary pages of the Self Assessment tax return. The total allowance calculated for the year is entered in the relevant boxes, and this amount is then deducted from the business’s turnover, along with other allowable expenses, to arrive at the final taxable profit.
The accounting method used by the business has a significant impact on how relief for assets is claimed. The detailed AIA and WDA rules described above apply primarily to businesses using traditional (accruals) accounting. For those using the simpler cash basis accounting, the rules are different. HMRC guidance states that under the cash basis, capital allowances can be claimed on cars in the usual way. However, “all other items you buy and keep for your business should be claimed as allowable expenses in the normal way”. This means that for a cash basis user, the cost of a new laptop or piece of machinery is simply treated as a regular business expense in the year it is paid for, rather than going through the formal capital allowances system. While the tax outcome is often the same for smaller purchases (a 100% deduction in year one), it is a critical technical distinction required to complete the tax return correctly.
FAQs
Navigating Capital Allowances in the UK
Understanding how to treat the purchase of major business assets is crucial for accurate tax planning. In the UK, instead of deducting the full cost of these items as a day-to-day expense, businesses use a system called capital allowances. This allows you to write off the value of an asset over time, reducing your taxable profit.
What is the capital allowance deduction UK?
A capital allowance is the UK’s equivalent of depreciation for tax purposes. When a business buys a significant asset, such as machinery, equipment, or a vehicle that is expected to last for several years, it cannot deduct the full cost from its profits in the year of purchase. Instead, it claims a capital allowance, which allows for a portion of the asset’s value to be deducted from profits each year. This provides tax relief over the effective life of the asset.
Can you claim capital allowances on hire purchase assets?
Yes, you can claim capital allowances on assets acquired through a hire purchase (HP) agreement. For tax purposes, the business is treated as owning the asset from the moment it is brought into use, even though legal ownership may not pass until the final payment is made. You can claim allowances on the full cash price of the asset, not just the payments made during the tax year.
What are the five conditions for granting capital allowance?
While there isn’t a universally cited list of exactly five conditions, the eligibility for claiming capital allowances hinges on several key principles. A business can generally claim if:
- It is a sole trader, partnership, or limited company carrying on a trade.
- The expenditure is on ‘plant and machinery’ for the purposes of that trade.
- The asset is owned by the business (which, as noted, includes items on hire purchase).
- The asset has been brought into use within the business.
- The expenditure is of a capital nature, not a day-to-day running cost.
Can you claim capital allowances when using cash basis?
If you are a self-employed sole trader or partnership using cash basis accounting, the rules are different. Under the cash basis, you generally cannot claim capital allowances. Instead, you deduct the full cost of the equipment or vehicle (excluding cars, for which specific rules apply) as a regular business expense in the year you buy it. This simplifies the process, but means the traditional capital allowance system does not apply.
What are capital allowances on sale of assets?
When you sell an asset on which you have claimed capital allowances, you must calculate a ‘balancing charge’ or a ‘balancing allowance’. If the sale price is more than the remaining tax value of the asset (its written-down value), the difference is a balancing charge, which is added to your profits and is taxable. If the sale price is less than the remaining tax value, the difference is a balancing allowance, which you can deduct from your profits, providing further tax relief.
How much expenses can I claim without receipts in the UK?
HMRC requires that all claimed business expenses be supported by proof of purchase, with receipts being the primary evidence. There is no official specified amount that you can claim without a receipt. If you are unable to obtain or have lost a receipt for a genuine business expense, you should make a detailed note of the expenditure, including the date, amount, and reason for the purchase. However, relying on this is risky, as HMRC may disallow the expense during an inspection if they are not satisfied with the evidence provided.
At what point can capital allowances be claimed?
Capital allowances can be claimed from the end of the accounting period in which the asset is purchased and brought into use within the business. The claim is made when you complete your tax return for that period. You do not have to claim the full allowance available; you can choose to claim a smaller amount or none at all, which might be a strategic choice in years where your profits are low.
Is profit on sale of fixed assets taxable?
Yes, any profit made on the sale of a fixed business asset is generally taxable. As explained above, if you have claimed capital allowances, this profit is typically taxed as a balancing charge and added to your business’s taxable income. If the asset is something on which you could not claim capital allowances (like freehold land), the profit would be subject to Capital Gains Tax instead.
What is a capital allowance in layman’s terms?
In simple terms, a capital allowance is the taxman’s version of depreciation. When your business buys a major piece of kit that lasts a while, like a van or a computer, you can’t just put the whole cost on your year’s expenses. Instead, the government lets you deduct a slice of its value from your profits each year. This reduces your tax bill over several years, reflecting the fact that the asset is wearing out or becoming outdated over time.
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