When you are self employed you are responsible for buying all the tools and equipment you need to run your business. If you have or are about to invest in expensive equipment, then understanding how you claim for tax relief can help you make clever decisions on how and when you make your claim for the Annual Investment Allowance.
What is the Annual Investment Allowance
The Annual Investment Allowance is a valuable tax break introduced a number of years ago by HMRC to encourage and promote business development. Under the rules of Annual Investment Allowance you can deduct 100% of the first £200,000 you spend on plant & machinery against your taxes in the year you have bought it, rather than using write down allowances of 18%.
What is Plant & Machinery
Plant & Machinery is the label HMRC gives to things you buy to use in your business and includes things that you use for a number of years such as:
It does not include cars.
Why is the Annual Investment Allowance So Beneficial When You’re Self Employed
You are always entitled to tax relief on business expenses, but without the Annual Investment Allowance, you would need to claim for the cost of plant & machinery you buy under the rules of Capital Allowances. This means you would be allowed to claim 18% of the cost of things you buy against your taxes rather than 100% in one go in the year you make your purchase.
So say you spent £2,000 on equipment for your business, until the standard capital allowances rules you would only be able to claim £360 against your taxes each year. However by using the Annual Investment Allowance you can claim the full £2,000 avoiding the need to wait for the full tax relief.
How to Claim for Your Annual Investment Allowance on Your Self Assessment Tax Return
You claim for your Annual Investment Allowance within the Capital Allowances section of your Self Assessment Tax Return.
The Annual Investment Allowance When You’re Newly Self Employed
Depending on your personal situation there are some things you should consider when it comes to claiming for the Annual Investment Allowance:
- You cannot claim for the Annual Investment Allowance if you want to claim for the HMRC Trading Income Allowance;
- If you have been in business for an accounting period of less than one year, then you need to pro rate the £200,000 allowance. For example if you have only been in business for 6 months, then you are only entitled to £100,000 (£200,000 x 6/12);
- If you already have another business and have started a new one then you only get one £200,000 Allowance if both your businesses are controlled by you, run from the same premises or have similar activities;
- You can use the Annual Investment Allowance to create a tax loss which you can carry forward against future profits you make. So if you are just starting out and have spent money on equipment then you should consider filling out a tax return so you can get tax relief in later years.
Personal Use and the Annual Investment Allowance
If you buy equipment that you use for personal as well as business then you can only claim for annual investment allowance on the business portion of what you paid.
Example: You buy a laptop for £1,500. You use it outside your business for half of the time. The amount of capital allowances you can claim is reduced by 50%, so £750.
You Don’t Have to Use the Annual Investment Allowance
The allowance is not mandatory so if you have low profits, for example, you could choose to claim:
- Write Down Allowances (which is 18% per year on most items);
- Claim a combination of annual investment allowance and write down allowances.
Top Tax Tip
If you are approaching the end of your accounting period and have plans to make some major business purchases that would be eligible for the Annual Investment Allowances, then if cash allows you could consider bringing those purchases forward. That way you will get 100% tax relief for that accounting period rather than having to wait a full year.
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.