How Capital Allowances Reduce Your Tax Bill
The business expenses you incur are allowable against your profits. But when it comes to fixed asset purchases (things like machinery, equipment, or vehicles), these purchases are treated slightly differently.
To reduce your tax bill when purchasing fixed assets, it’s important to know what capital allowances are available and how you can use them to enhance your tax planning.
What are capital allowances?
Fixed assets are classed as items of equipment that will be used in the business for more than a year – so, things like office furniture, machinery and company vehicles. For accounting purposes, the cost of these fixed assets is spread over the expected life by calculating a depreciation charge each year – in other words, the value the item will lose over this time.
For tax purposes, the depreciation is added back (disallowed) and ‘writing down allowances’ are claimed instead.
There is an Annual Investment Allowance (AIA), currently £1 million but falling to £200K after 31/12/2023. Most asset purchases up to that total can be claimed in full in the year of purchase. The main exceptions are cars and items you owned for another reason before putting them into the business.
For some assets, 100% First Year Allowances (FYA) are available. These include:
New vehicles with Nil CO2 emissions
Specified energy-saving equipment
Specified water-saving equipment
For everything else you might purchase as a fixed asset, the costs are allocated into various pools depending on the type of asset and Writing Down Allowances (WDA) calculated on the pool value on a reducing balance basis. These include:
Special Rate Pool 6% rate – Cars (new or used) with CO2 emissions > 50 g/km, Integral fittings incorporated into commercial buildings (lifts, electrical and water reticulation, air conditioning, heating equipment), long-life (>25 years when new) items over £100K annual spend. Long-life excludes structures and buildings.
Main Rate Pool 18% rate – everything else. Note as specifics this includes cars with CO2 emissions >0<110 g/km.
Structures and Buildings Allowance (SBA) – the SBA offers a 3% flat rate for 33.33 years on non-residential buildings, but not on land.
What is the super-deduction capital allowance?
Super-deduction was announced in Spring Budget 2021, with the aim of encouraging UK companies to invest in fixed assets, growth, and the recovery of the business economy. It does this by offering a substantial capital allowance on any qualifying assets, reducing the company’s corporation tax bill and freeing up cash to re-invest back into the business.
NOTE: The allowance only applies to UK limited companies, not to unincorporated businesses such as self-employed businesses or sole traders.
From April 2021 to March 2023 the allowances have been increased as follows:
Most items which would have qualified for AIA or for inclusion in the main rate pool will attract a FYA of 130%.
Items that are included in the Special Rate Pool will be eligible for a FYA of 50%.
Both FYA 130% and 50% exclude cars, equipment purchased to lease out, second hand items, purchases contracted for before 03/03/2021.
Talk to us making use of capital allowances
If you’re thinking of purchasing capital equipment, it’s worth knowing that, in some cases, the tax benefit can be spread over several years. With the temporarily enhanced deductibility, this will have a positive short-term impact on both your tax charges and your cashflow.
As your accountant, we can advise you on the tax treatment of different types of assets and, if external funding is required, can help you prepare business plans and finance applications.
Get in touch talk through your capital equipment plans.