Capital allowances are rates set by HMRC that self-employed business owners must use to claim tax relief on fixed assets. 

So if you have purchased an asset for your business, then this is how you can claim tax relief on your self-assessment tax return form.

What is a Fixed Asset

A fixed asset is something you buy to run your business, rather than an overhead. 

Generally they last for a number of years and include things like:

  • Computers;
  • Tools;
  • Furniture;
  • Equipment.

Learn More: What is a Fixed Asset and How to Calculate Its Cost

Why Did HMRC Introduce Capital Allowances

When you buy a piece of equipment, like a laptop, you pay for it up front and then use it for a few years.

So if you pay £1,500 the laptop and plan to use the computer for 3 years, then ideally you would claim £500 as an expense against your taxes for 3 years.

What this meant was businesses reduced the number of years they said they were going to use equipment to accelerate their claim against their taxes.

To equalise things, HMRC has rules for tax (not accounting) purposes, these are Capital Allowances. These rules set out percentage tax relief a business can claim each year, depending on what they have bought.

Annual Investment Allowance 2019/2020

The Annual Investment Allowance (AIA) is a valuable tax break introduced a number of years ago by HMRC to encourage business growth. 

The Annual Investment Allowance for 2019/2020 is £1m.

That means businesses can claim 100% tax relief on fixed assets that meets the AIA criteria in the year they bought it.

Learn More: Annual Investment Allowance

HMRC Capital Allowances Rates 2019/2020

There are three main categories of Capital Allowances:

1. Main Rate Pool – 18%

This pool includes things like plant & machinery, equipment and furniture.

2. Special Rate Pool – 8%

This is a unique category and refers to purchases which are:

  • parts of a building considered integral – known as ‘integral features’;
  • items with a long life of over 25 years;
  • thermal insulation of buildings;
  • cars with CO2 emissions of more than 130g/km.

3. Single Asset Pool – 18% or 8%

A business can create a single asset pool where an asset that has a really short life but you cannot include in this pool any cars, special rate items (number 2 above) or anything that you use for non-business reasons.

All the above exclude Cars.

Capital Allowances on Cars

Business can claim for Capital Allowances on cars, but the amount they can claim is based on Co2 emissions and whether it is new or second hand.

Capital Allowance Rates of Cars from April 2015 are:

Capital Allowances on Cars from 1 April 2018

Description of carCapital Allowances Claim% Claim
Second hand, CO2 emissions of 110g/km or less or electricMain rate18% writing down allowance
New and unused, CO2 emissions of 50g/km or less or electricFirst year allowance100% first year allowance
New and unused, CO2 emissions between 50g/km and 110g/kmMain rate18% writing down allowance
New or second hand, CO2 emissions above 110g/kmSpecial rate8% writing down allowance

How to Capital Allowances on Your Tax Return

You’ll need to claim your capital allowances in the self-employment section of your self-assessment tax return.

You can choose to show depreciation, but this will be flagged as a disallowable expense and added back when calculating your business profits.

Updated 10 April 2019

Anita

Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.
Anita