Capital allowances are a type of tax relief for large purchases such as equipment, machinery, or business vehicles. They allow you to deduct some or all of the value of an item from your profits before you pay tax.
If you are a sole trader or partnership, with an income of £150,000 or less, you can use cash basis accounting instead of capital allowances.
Annual Investment Allowance (AIA)
This is the main form of capital allowance, and it covers everything except for vehicles. The Annual Investment Allowance gives a deduction of 100% of the cost of ‘qualifying expenditure’ from our business income, up to their annual limit. In 23/24 the annual limit is up to £1million on certain plant and machinery.
You can read more about this on the government website here: https://www.gov.uk/capital-allowances
Other forms of capital allowances
‘Writing down allowances’ allow you to deduct a percentage of the value of certain items from your profits each year.
‘100% first year allowances’ means that if you buy an asset that qualifies that you can deduct the full cost from your profits before tax.
Vehicles
Special rules apply to cars. The rates of allowance are usually based on CO2 emissions. Vehicles with private use must be treated separately.
You can read more about this here: https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23500
Capital allowances are complex, and when utilising them it may be best to take advice from a tax professional.
