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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Business expenses: capital and capital allowances

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. 

Content on this page:

Basics

Expenses in your business will either be revenue (trading) expenses or capital expenditure. We explain the difference between revenue and capital expenditure and how revenue expenses are dealt with for tax purposes on our page Business expenses allowable for tax .

Capital allowances are a way of obtaining tax relief for some types of capital expenditure. They are treated in a similar way to other business expenses when calculating taxable profits. See our page Calculating self-employed profits for more information on this.

The expenditure must be on a particular type of asset. You must usually own the asset on which the capital allowances are claimed.

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 in the business. Any interest on hire purchase items is a revenue (trading) expense and not part of the capital expenditure.

If you have hired or leased the asset but you will not own the asset at the end of the hire/lease period, capital allowances may not be claimed, but you can usually obtain some tax relief on the rental costs as revenue expenditure.

  The super-deduction capital allowance for the two-year period 1 April 2021 to 31 March 2023 is available for companies only and not for unincorporated businesses such as self-employed individuals or partnerships.

Capital allowances 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.

Plant and machinery

On this page we are only going to look in detail at plant and machinery capital allowances, but you can find out about other types of allowances on GOV.UK.

The most common assets which you may purchase that qualify for plant and machinery capital allowances are as follows:

  • motor cars,
  • vans,
  • computers, printers, etc.
  • tools (such as lawnmowers, saws, etc.)
  • specialist machinery,
  • integral features (fittings within a building that cannot easily be removed, such as cold water systems, electrical systems, heating or ventilation systems, etc. – see GOV.UK for more information),
  • fixtures and fittings (items that are fitted into a building but could be removed more easily than integral features, for example fire alarm systems – see GOV.UK for more information).

The main items that do not attract plant and machinery 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 which do qualify.

There are currently two main types of capital allowances for plant and machinery.

Annual investment allowance (AIA)

The annual investment allowance (AIA) provides 100% tax relief on assets qualifying as plant and machinery, subject to an annual maximum. Some assets are excluded from AIA, the most common ones are cars and integral features.

It is not possible to claim AIA on assets which you owned and used for another reason (such as for personal use) before using them within the business or on assets that were given to you for your business. (In these circumstances you can claim a writing down allowance in the main (general) pool or special rate pool. See our writing down allowances (WDA) heading below.)

The maximum amounts have varied since AIA was introduced. The maximum amount from 1 January 2019 to 31 March 2023 is £1,000,000. AIA can only be claimed in the year the asset is purchased. If capital allowances are not claimed in that year, then the assets will need to be added to the general pool so that writing down allowances can be claimed in future. There is more information on AIA on GOV.UK.

Writing down allowances (WDA)

Accordion content.Expenditure on assets that doesn’t qualify for annual investment allowance (AIA) is pooled together in what is known as the general pool (for more information, see the Annual investment allowance (AIA) heading above).

If the expenditure is for an asset which is used partly for business and partly for private purposes, this expenditure has to be kept separately (see the below heading, Both business and non-business purposes). Writing down allowances give tax relief on the value of assets held in the pool.

The 'normal' allowance is a writing down allowance of 18% of expenditure in the general pool. There is also a writing down allowance of 6% for expenditure in the special rate pool. 

Example: Cedric

Cedric has a capital allowances general pool balance brought forward from the previous tax year of £2,400 before claiming allowances for 2022/23. If he has no additions or disposals of assets during that year, his claim for capital allowances would be £2,400 x 18% = £432.

So, Cedric can claim a writing down allowance of £432 and deduct that from his profits for tax purposes.

His pool written down value to carry forward to the following year is then £2,400 less £432 = £1,968.

If you have an asset that does not qualify for the annual investment allowance (AIA) it will need to be added to the general pool so writing down allowances can be claimed. 

Example: Martha

Martha has a capital allowances general pool balance brought forward from the previous tax year of £2,400 before claiming allowances for 2022/23. In 2022/23, she was given a second-hand van worth £4,000 for use in her business. This does not qualify for AIA, so the market value of the asset of £4,000 must be added to the main writing down allowance pool.

Her capital allowances writing down allowance calculation for the general pool are as follows:

 

£

Written down value brought forward

2,400

Additions

4,000

 

6,400

Writing down allowance (18%)

-1,152

Written down value carried forward

5,248

As most assets now qualify for the annual investment allowance it is less common to see additions being made to the main writing down allowance pool.

The main items in the special rate pool will be long-life assets (see GOV.UK), integral features (see the heading Plant and machinery above) or cars. These items only attract a writing down allowance at 6% each year but with the exception of cars you should in most cases be able to claim the annual investment allowance first before using the special rate pool.

If you have a balance of £1,000 or less in the 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.

If exceptionally, your accounting period is longer or shorter than 12 months, then writing down allowances must be adjusted for this. This is done by pro-rating the allowances according to the length of the period of the accounts. So, if accounts are prepared for a 15-month period (say, at the start of trading), writing down allowances are 15/12 of the usual amounts. Similarly, if accounts are prepared for a 6-month period writing down allowances would be 6/12 of the usual amount.

Cars

The government continues to use capital allowances to try and encourage the use of more environmentally friendly cars. Broadly new and unused cars with zero CO2 emissions will attract a full 100% first year allowance; cars with CO2 emissions below 50g/km can claim 18% writing down allowance in the main pool; cars with higher CO2 emissions will be placed in the special rate pool (6% rate of capital allowances).

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.

Example: Amber

Amber wants to purchase a car during the 2023/24 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 zero CO2 emissions (such as an electric car), or a car with low CO2 emissions.

If Amber purchases a new zero CO2 emissions car 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 zero CO2 emissions car can be claimed as a capital allowance on Amber’s 2023/24 self assessment tax return.

If Amber purchases a car with higher CO2 emissions (above 50g/km) which costs £8,000 then the expenditure 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 2023/24, Amber would receive capital allowances of £480 (£8,000 x 6%).

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.

Both business and non-business purposes

You can still claim capital allowances where a car is used for both business and private purposes, but you can only claim for the proportion of business use of the car.

Example: Norton

Norton intends to purchase a new zero CO2 emissions car for £18,000. It will be his only car, so he will be using it for non-business trips as well as for business purposes.  He estimates his private usage will be 25%, therefore he will be able to claim a first year allowance of £18,000 x 75% business use which is £13,500.

If Norton decides to purchase a higher emissions (above 50g/km) car for £12,000 then he will be able to claim writing down allowances in 2023/24 equal to 75% of the full amount calculated at£540:

£12,000 x 6% = £720

£720 x 75% = £540

Norton will not get tax relief for the ‘private usage’ element of the capital allowances.

If Norton buys the higher emissions vehicle, and his special rate pool expenditure was nil prior to this purchase, his special rate pool calculation will be as follows:

  Special rate pool
£
Amount of writing down allowance on tax return
£
Written down value brought forward

0

 
Additions

12,000

 
 

12,000

 
Writing down allowance (6%)

-720

540 (£720 x 75%) restricted for private usage
Written down value carried forward

11,280

 

As shown above, the special rate pool balance carried forward to the next tax year (2024/25) for tax purposes is reduced by the full £720, even though the actual allowances Norton is entitled to is only £540.

You can look up the actual levels of CO2 emissions of cars on GOV.UK if you do not know this when trying to work out the correct capital allowances.

When assets are sold

If you sell an asset, you deduct the sales proceeds from the balance of the main writing down allowance pool, but you cannot deduct more than the original cost of the asset.

In most cases, the annual investment allowance (AIA) will previously have been claimed for the full cost of the asset at the time of its original purchase. 

Example: Dario

Dario has a main pool balance brought forward from the previous tax year of £1,500. 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 calculation for the main pool would be as follows:

 

£

Written down value brought forward

1,500

Less: proceeds from sale of machine

-1,200

 

300

Writing down allowance (18%)

- 54

Written down value carried forward

246

Sale proceeds more than main pool balance

If you deduct the sale proceeds of the asset on which you have previously claimed the annual investment allowance from the main pool and the sale proceeds are more than the balance in the pool so it makes the balance on the main pool negative, then instead of a capital allowance, a ‘balancing charge’ has been generated. This is added to trading profits rather than being deducted from them.

Example: Brianna

Brianna has a main pool balance brought forward from the previous tax year of £1,500 at 6 April 2022. During the 2022/23 tax year she sells an item of equipment for £2,200 which she had bought for £4,000. Brianna had previously claimed AIA of £4,000.

 

£

Written down value brought forward

1,500

Less: proceeds from sale of equipment

-2,200

Balancing charge

700


So, Brianna has £700 to add to her profits for 2022/23.

Vehicle scrappage schemes

In some parts of the UK such as London, Birmingham, Sheffield and Glasgow, clean air zones have been introduced by the local authorities in recent years. As part of the introduction of these schemes some local authorities have provided cash grants to encourage people who have vehicles which do not meet the required low emissions standard to scrap them and replace them with a newer vehicle that does meet the required standards.

If you receive a payment from a local authority for scrapping a car or van that you use for business this will have implications with regard to the capital allowances you can claim for tax purposes. This is because in this situation the grant, together with any sums received for actually scrapping the vehicle, make up the ‘sale proceeds’ for the scrapped vehicle for capital allowances purposes.

If the vehicle that has been scrapped is a car in respect of which capital allowances have previously been claimed (see Capital allowances for cars and Cars used for both business and non-business purposes above), then see Capital allowances when an asset is sold above.

If the vehicle that has been scrapped is a van, then the capital allowances treatment depends on whether or not you are using the cash basis. If you are not using the cash basis and the van is one in respect of which annual investment allowance (AIA) capital allowances have previously been claimed (see Annual investment allowance (AIA) above) and you have a balance of expenditure in your writing down allowance pool, then see Capital allowances when an asset is sold below.

If the vehicle that has been scrapped is a van in respect of which annual investment allowance (AIA) capital allowances have previously been claimed (see Annual investment allowance (AIA) above) and you do not have a writing down allowance pool balance, then there is a clawback of some of the AIA previously claimed. The amount of the clawback is equal to the sale proceeds, which forms taxable income (known as a balancing charge) for your business. However, the clawback cannot be more than the AIA that was originally claimed.

If exceptionally, the sale proceeds are more than the original cost of the van, then there may be capital gains tax implications. If the difference between the sale proceeds and the original cost is less than the capital gains tax annual exemption for the tax year and you have no other capital gains in the tax year, there should not be any further tax consequences. But if the difference is larger than the capital gains tax annual exemption or your annual exemption is being used against other capital gains in the tax year then the van must be treated as what is known as a chattel. We explain about the capital gains tax treatment of chattels on our page Selling shares and other assets

If you prepare your accounts on the cash basis and you claimed the original cost of the van as an expense in the accounting period in which you bought the van, then the sale proceeds must be treated as additional taxable income in the accounting period in which it is received.

If you are using the accruals basis when you buy a vehicle for your business to replace the scrapped vehicle, this should qualify for annual investment allowance if it is a van or writing down allowances if it is a car in the usual way. If you use the cash basis then the cost of a replacement van is an allowable expense or the cost of a replacement car can qualify for writing down allowance capital allowances, as usual.

More information

This page gives you an outline of the rules on capital allowances, but we cannot cover every scenario. HMRC’s helpsheets HS222 and HS252provide further information about capital allowances and there is further information on GOV.UK.

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.

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