What capital allowances can I claim?
On this page, we explain what capital allowances are and how to claim them. Remember that if you use the cash basis of accounting you will not claim capital allowances except on the purchase of cars.
Expenses you incur in your business can either be revenue (trading) expenses or capital expenditure. Normally if an item will have a lasting benefit for the business, certainly longer than a year, it will be classed as capital expenditure. We explain how revenue expenses are dealt with on our What business expenses are allowable? page.
Capital allowances are a way of obtaining tax relief on some types of capital expenditure. They are treated as another business expense and so reduce your taxable profit within your basis period. You can find out more about accounting and basis periods on our How do I work out my taxable profits? page.
Matthew draws up his accounts for the year to 31 October 2018. Those accounts form his basis period for the 2018/19 tax year. Any capital expenditure in the year to 31 October 2018 is also eligible for capital allowances in the 2018/19 tax year.
No. The expenditure must be on a particular type of asset. Generally you must own the asset on which the capital allowances are claimed. In other words if you have hired or leased the asset, capital allowances may not be claimed, but you may obtain tax relief on the rental costs as revenue expenditure.
There are special rules relating to assets acquired on hire purchase or finance leases. Generally, these assets are treated as belonging to the person using them, even though legal ownership may not pass until a final payment is made at the end of the contract term. In order to claim capital allowances, these assets must have been brought into use. Any interest on hire purchase items is a revenue (trading) expense and not part of the capital expenditure.
They must be claimed in your Self Assessment tax return and they must normally be claimed by 12 months after the 31 January filing deadline for the return.
In these pages we are only going to look at plant and machinery allowances but you can find out about other types of allowances at GOV.UK.
The most common assets which you may purchase and that will qualify for capital allowances are as follows:
- Motor car
- Computer, printer, etc
- Tools, for example lawnmower, saw, etc
- Specialist machinery
The main items that will NOT attract capital allowances include the cost of buildings or property, although it is possible that part of the cost of the building might relate to integral features or to fixtures. Note that you will only be able to claim capital allowances relating to a building if it is not a residential property and the property is used for business purposes, for example if is an office or a shop.
There are special allowances (called first year allowances) for energy efficient or environmentally beneficial plant and machinery.
Integral features are fittings within the building that cannot easily be removed, for example cold water systems, electrical systems, heating or ventilation systems, etc. See GOV.UK for more information.
These are items that could be removed from a building without too much difficulty, for example shelving. See GOV.UK for more information.
I use my car for private purposes as well as business purposes. Can I still claim capital allowances?
Yes, but you can only claim for the proportion of business use of the car.
So, if your car is used 25% of the time for private purposes then you must restrict the capital allowances that you claim on your Self Assessment tax return to exclude the amount relating to the private use. For example, if the capital allowances for your car are calculated at £2,400 then you would claim for 75% of this amount, £1,800, for the business usage of the car only. You will not get relief for the £600 ‘private usage’ element of the capital allowances. The value of the car carried forward to the next tax year for tax purposes will be reduced by the full £2,400.
The 'normal' allowance is a writing down allowance of 18%, or a special pool writing down allowance of 6%. But there is currently a much more beneficial allowance available, the annual investment allowance (see below).
The annual investment allowance (AIA) provides 100% tax relief on assets qualifying as plant and machinery, subject to an annual maximum and excluding cars. Also, it is not possible to claim the AIA on assets which you owned and used for another reason (such as for personal use) before using them within the business, in which case you may use the small pools allowance or claim a writing down allowance in the main general pool.
The maximum amounts have varied since the AIA was introduced. The maximum amounts for the current and previous tax years are as follows:
|From 1 January 2016 to 31 December 2018||£200,000|
|From 1 January 2019 to 31 December 2019||£1,000,000|
There is more information on the AIA on GOV.UK.
It is a way of giving tax relief on part of the value of assets held in a pool. An example may make this clearer.
Cedric has a capital allowances pool brought forward of £24,000 before claiming allowances for 2018/19. If he has no additions or disposals of assets during that year, his claim for capital allowances would be as follows:
|Written down value brought forward||£24,000|
|Writing down allowance (18%)||£4,320|
|Written down value carried forward||£19,680|
So Cedric can claim a writing down allowance of £4,320 and deduct that from his profits for tax purposes.
What happens to capital allowances if accounts are drawn up for a period that is not 12 months?
Writing down allowances are pro-rated to the length of the period of accounts. So if a 15 month period of accounts is prepared (say, at the start of trading), writing down allowances are 15/12 of the usual amounts.
If you have a balance of £1,000 or less in your main general pool or special rate pool then you can claim capital allowances (called the small pools allowance) on the full amount. You cannot claim the small pools allowance and writing down allowances.
The main items in this pool will be long-life assets or cars with higher carbon dioxide (CO2) emissions.
From April 2019, these items only attract a writing down allowance at 6% each year but with the exception of cars you should be able to claim the annual investment allowance first before using the special rate pool.
What happens if the capital allowances rates change part way through my accounting period?
You will need to apportion the rate at which the allowance is given. This is best shown using an example of the special rate pool which was 8% for the 2018/19 tax year then reduced to 6% for the 2019/20 tax year.
Ellis is self-employed and prepares his accounts to 31 December. During his accounting period ending 31 December 2019 he purchases assets which fall under the special rate pool, the cost and date of purchase of these assets is as follows:
February 2019 – £12,000
June 2019 – £20,000
When Ellis prepares his accounts and tax return for 2019/20, he must calculate the capital allowances by apportioning the special rate. For three months of his accounting year the rate was 8% then for nine months it was 6%. Therefore the special rate that Ellis must use for his capital allowances calculation is worked out as (8% x 3/12) + (6% x 9/12) which is 6.5%. Therefore, Ellis will claim capital allowances of £2,080 (calculated as £32,000 at 6.5%) in his 2019/20 tax return,
The government continues to use capital allowances to try and encourage the use of more environmentally friendly cars. Broadly new cars with very low CO2 emissions will attract a full 100% allowance; cars with high CO2 emissions will be placed in the special rate pool and other cars will fall into the general pool. Any car that you use privately will be placed in a separate pool as allowances will be restricted by the amount of private use you have.
Amber wants to purchase a car during the 2019/20 tax year, to use in her self-employed business. She wants to know how the capital allowances would be calculated if she buys a car with low CO2 emissions, or a car with higher CO2 emissions and what would happen if she uses the car for private use as well as on business.
If Amber purchases a new low CO2 emissions car (so below 50g/km) which costs £15,000 then the car would be eligible for First Year Allowances (cars are not eligible for the annual investment allowance). The First Year Allowance means that the full cost (£15,000) of the low CO2 car can be claimed as a capital allowance on Amber’s 2019/20 Self Assessment tax return.
If Amber purchases a car with higher CO2 emissions (so above 130g/km) which costs £8,000 then the capital allowances would not be eligible for First Year Allowances instead it would fall under the special rate pool and receive capital allowances at 6%. This means that in 2019/20 Amber would receive capital allowances of £480 (£8,000 x 6%).
If Amber wants to use the car for private purposes, then she will need to apportion the capital allowances between her business and private use and only claim capital allowances for the business element (see an example illustrating this).
There is more information on how to calculate capital allowances on cars based on purchase date, CO2 emissions and whether the car was new or second-hand on GOV.UK.
You can look on the Vehicle Certification Agency website.
If you purchase an asset but the asset does not qualify for AIA, it will need to be added to the main capital allowances pool.
Look at the example above with Cedric again. Now assume that in 2018/19 he buys an asset that does not qualify for the annual investment allowance, so the cost of the asset of £12,000 must be added to the general pool. His capital allowances computation for the general pool would be as follows:
|Written down value brought forward||£24,000|
|Writing down allowance (18%)||£6,480|
|Written down value carried forward||£29,520|
If you sell an asset you deduct the sales proceeds from the balance of the pool, but you cannot deduct more than the original cost of the asset. In most cases AIA will previously have been claimed and as these assets would ordinarily have formed part of the writing down allowance pool, the proceeds must go through this main pool.
David has a general pool balance brought forward of £10,000. He sells a machine during the year for £1,200 (it had originally cost £3,500) and AIA had been claimed at the time in respect of this. His capital allowances computation for the general pool would be as follows:
|Written down value brought forward||£10,000|
|Less: proceeds from sale of machine||£1,200|
|Writing down allowance (18%)||£1,584|
|Written down value carried forward||£7,216|
If you deduct the sale proceeds of the asset on which you have previously claimed AIA from the general pool and that makes the balance on the main pool negative, then instead of a capital allowance, a balancing charge has been generated and that is an amount that is added to trading profits rather than being deducted from them.
Brenda has a main pool balance brought forward of £1,500 at 6 April 2018. During the 2018/19 tax year she sells an item of equipment for £2,200. The equipment previously attracted a 100% allowance.
|Written down value brought forward||£1,500|
|Less: proceeds from sale of equipment||£2,200|
So Brenda has £700 to add to her profits for 2018/19.
This page gives you an outline of the rules on capital allowances but we cannot cover every scenario.
HMRC also produce webinars periodically which cover capital allowances and also have e-learning packages available. For more information on these learning tools, see GOV.UK.