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Capital allowances are a (horrendously) complex area of UK tax, but claiming allowances wherever possible can help a business to make a big dent in its tax bill.

To make things extra confusing, there are different types of capital allowances available, with their own rules, claim limits, and thresholds.

Our Beginners Guide to Capital Allowances starts with the basics, or carry on reading to learn more about what types of capital allowances there are:

What is the annual investment allowance (AIA)?

The annual investment allowance (AIA) is a way for businesses to claim tax relief on the assets they buy. You can use it to deduct all of an asset’s value from your profits before tax.

Is there a limit to how much annual investment allowance I can claim?

Yes, there is! You can normally claim the AIA up to a maximum limit of £200,000 in a year. This has been temporarily increased to £1,000,000 as a way of stimulating business investment. You might use it on one big mega asset, or across several. The temporary limit is in place until 31st March 2023.

When can I claim AIA for an asset?

You can only claim the annual investment allowance for an asset in the financial period that you bought the item. For AIA purposes, the date of purchase is either:

What about if I’m VAT-registered?

If your business is registered for VAT, you can normally reclaim any VAT you pay on purchases. This means that you’ll claim the VAT back through your VAT return, and then the annual investment allowance on the rest.

Annual Investment Allowance (AIA) at a glance

 

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What are first year allowances (FYA)?

Similar to the annual investment allowance, you can claim up to 100% of an asset’s value using first year allowances (FYA). The difference is that these must be ‘qualifying’ items.

Assets that qualify for first year allowances are generally environmentally friendly items such as:

You can claim first year allowances for these items as well as the annual investment allowance. They don’t count towards the AIA limit – happy days.

First Year Allowances (FYA) at a glance

What is the super deduction?

The super deduction is a type of capital allowance which is available until 31st March 2023. Instead of claiming 100% of an asset’s value, you can use the super deduction to claim 130%. It’s only available for:

Unlike the AIA which has a £1 million limit, there isn’t a cap on the super deduction.
 

What is the Special Rate allowance?

The Special Rate (SR) allowance is an alternative to super deduction for assets that don’t qualify for the main rate pool (we explain how ‘pools’ work below!)

Assets qualifying for the 6% special rate pool, including integral features in a building and long-life assets, will fall into this category.

Businesses can claim 50% of the qualifying cost in the first year, with the remaining balance of the asset going into the special rate pool for subsequent tax years.

Like the super deduction, the special rate allowance doesn’t have a limit.

Writing down allowances

If you can’t use the annual investment allowance, you can use ‘writing down allowances’ instead. This might be because you’ve already used up your AIA, or because the asset doesn’t qualify for the annual investment allowance.

If you’re claiming writing down allowances, assets are allocated to what HMRC calls ‘pools’. These determine the rate of allowance that the asset qualifies for. The different pools reflect the kind of wear, tear, and depreciation that an asset may suffer.

 

Pool Rate What it covers
Main rate pool 18% This covers the majority of business assets, such as plant and machinery, office equipment, software, and commercial vehicles.
Special rate pool 6% The special rate pool is for longer-term assets such as building alterations, thermal insulation, and cars with CO2 emissions over a certain threshold.
Single asset pool 18% or 6%, depending on the type of asset. You can also put assets into a single asset pool. This is where the asset might have a short life for example. In practice, these are fairly rare.

 

Working out the writing down allowance

Once you have the value of your asset and you know what pool it is in, you can work out the writing down allowance.

In this example, we buy a pillar drill. This belongs the main pool, so has a rate of 18%

 

Asset Value Tax Allowance
Asset cost £10,000
Year 1 writing down allowance (18% of the asset cost) £1,800
Written down value £10,000 – £1,800 = £8,200
Year 2 WDA (18% of the written down value) £1,476
Written down value £8,200 – £1,476 = £6,724
Year 3 WDA £1,210
Written down value £6,724 – £1,210 = £5,514
Year 4 WDA £992
Written down value £5,514 – £992 = £4,522
Year 5 WDA £814
Written down value £4,522 – £814 = £3,708

 
This assumes that you haven’t claimed first year allowances, annual investment allowances, or a super deduction or special rate deduction. This is because once you claim these, there will be no written down value left.

Claiming capital allowances

You can claim capital allowances as part of your tax return – just remember to tick the option to claim so that these pages are available.

We always advise that you speak to your accountant before making any purchases, so they can help you be as tax efficient as possible.

Learn more about our online accounting services. Call 020 3355 4047, or get an instant quote online.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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