Capital Allowances for Businesses: Maximise Your Tax Savings

As a business owner, maximising your tax relief is crucial for improving your cash flow and reducing your tax burden. Capital allowances offer a valuable opportunity for businesses to reclaim tax on the cost of certain assets like machinery, vehicles, office equipment, and even energy-efficient assets.  

In this guide, we’ll explore what capital allowances are, the different types available, which assets qualify, and how to claim them—ensuring your business maximises its tax savings.

Table of Contents

• Key Takeaways

• What Are Capital Allowances? 

• Types of Capital Allowances for Businesses

  • 1. Annual Investment Allowance (AIA)

  • 2. Writing Down Allowance (WDA)

• 3. First-Year Allowances (FYA) 

  • 4. Research and Development Allowances (RDA)

• How Capital Allowances Benefit Your Business

• What Assets Qualify for Capital Allowances?

• How to Claim Capital Allowances

  • For Limited Companies

  • For Sole Traders & Partnerships

  • For Employees

• Key Considerations When Claiming Capital Allowances

• Why Capital Allowances Are Crucial for Your Business

• Conclusion: Maximise Your Business Tax Relief

Key Takeaways

Maximise Tax Savings – Capital allowances allow businesses to deduct the cost of assets from taxable profits, reducing tax liabilities and improving cash flow.

Types of Capital Allowances – Different types include the Annual Investment Allowance (AIA), Writing Down Allowance (WDA), First-Year Allowances (FYA), and Research and Development Allowances (RDA).

Eligible Assets – Assets such as machinery, business vehicles, office equipment, and energy-efficient technology qualify for capital allowances.

Claiming Capital Allowances – The process for claiming varies depending on business structure (limited company, sole trader, or partnership).

Encourage Business Investment – Capital allowances incentivise investment in long-term assets that contribute to business growth, productivity, and sustainability.

What Are Capital Allowances?

Capital allowances are a form of tax relief that allows businesses to deduct the cost of capital assets from their taxable profits. This reduces the amount of tax you pay in the year of purchase, rather than requiring you to spread the cost over multiple years. It’s a way for businesses to gain financial relief when investing in essential assets needed for operations. 

The key to understanding capital allowances for businesses lies in knowing which assets qualify and how to claim them. These allowances can be claimed on items like machinery, vehicles, office furniture, and even buildings. The aim is to help businesses reduce their tax liability and encourage investment in long-term assets that are crucial to growth and productivity. 

Types of Capital Allowances for Businesses

There are several different types of capital allowances available to businesses, depending on the nature of the asset and its usage. Understanding these options is key to maximising your tax savings. 

1. Annual Investment Allowance (AIA)

The AIA is a powerful tax relief for businesses that allows you to claim 100% of the cost of qualifying assets in the year they are purchased. AIA is available for plant and machinery, which includes a broad range of assets such as equipment, machinery, and vehicles. 

• AIA Limit: As of now, businesses can claim up to £1 million per year under AIA. This limit applies to both incorporated and unincorporated businesses (including sole traders and partnerships). 

• Eligible Assets: The assets that qualify for AIA include new and used plant and machinery, but cars are excluded. Items like computers, office furniture, and manufacturing machinery can all qualify. 
  

2. Writing Down Allowance (WDA)

For assets not eligible for AIA, businesses can claim WDA, allowing deductions over time:

• WDA Rate: The standard WDA rate for most plant and machinery is 18% per year, which means you can deduct 18% of the value of the asset from your profits each year. 

• Special Rate: For certain items like integral features or long-life assets, the WDA rate is reduced to 6% per year. 

This approach helps businesses manage tax relief on high-cost assets more effectively.

3. First-Year Allowances (FYA)

Certain energy-efficient assets and environmentally friendly products may qualify for First-Year Allowances (FYA), allowing businesses to claim 100% relief on their purchase in the first year. 

• Eligible Assets: Assets like zero-emission cars, electric vehicle charging points, and energy-efficient equipment can qualify for FYAs. 

• Tax Relief: FYAs are particularly valuable for businesses looking to invest in green technology and improve sustainability. 
  

Find out more guidance from the UK government's page on Enhanced Capital Allowances for Energy-Saving Equipment.

4. Research and Development Allowances (RDA)

RDA provides 100% tax relief on capital expenditure related to R&D. Businesses investing in research facilities, innovative equipment, or lab infrastructure can benefit significantly from this allowance.

• 100% Tax Relief: Businesses can claim 100% tax relief on capital expenditure used directly for R&D activities. 

• Eligible Expenses: The RDA includes costs associated with purchasing capital equipment and creating facilities used for R&D activities, including construction or refurbishment costs. 
  

How Capital Allowances Benefit Your Business

1. Reduce Taxable Profits
   

Claiming capital allowances lowers taxable profits, reducing corporate tax bills and increasing available cash for reinvestment.

For example, if your business buys a new piece of machinery worth £50,000, and you claim AIA for the full amount, your taxable profits will be reduced by £50,000. This could result in significant tax savings, especially for larger businesses investing in substantial assets. 

2. Encourage Investment In Long-Term Assets

Capital allowances are designed to encourage businesses to invest in assets that will benefit them over the long term. These investments, whether in new machinery, energy-efficient vehicles, or office equipment, can help improve productivity and drive business growth. 

In turn, businesses can claim capital allowances to offset these investments against their tax liabilities, creating a financial incentive to improve operations and expand. 

3. Improve Business Cash Flow

Reducing taxable profits also has a positive impact on your business cash flow. With lower tax payments, your business can keep more funds to reinvest in growth, pay off debt, or handle operational costs. This can be especially valuable for small businesses that need to improve cash flow for expansion or day-to-day operations. 

What Assets Qualify for Capital Allowances?

To claim capital allowances effectively, businesses should understand which assets qualify:

• Plant and Machinery: This includes items like machinery, equipment, office furniture, and technology that are used in the day-to-day running of the business. 

• Business Vehicles: Vehicles such as vans, trucks, and cars can qualify for capital allowances, although the exact allowance may vary based on factors like emissions.

• Building Features: Certain integral features of buildings, like heating, air conditioning, lighting systems, and lifts, may also qualify for capital allowances.

• Energy-Efficient Assets: Items such as electric cars, electric vehicle charging points, and other green technologies qualify for special tax relief through First-Year Allowances.
  

How to Claim Capital Allowances

Claiming capital allowances is a straightforward process but requires attention to detail. Here’s how businesses can claim: 

For Limited Companies

Businesses claim capital allowances through their corporation tax return (CT600). Keep records of purchases, invoices, and asset use for submission to HMRC.

For Sole Traders & Partnerships

Sole traders and partnerships claim capital allowances via self-assessment tax returns, with relevant details included in their annual filings.

For Employees

Employees can also claim capital allowances if they purchase assets for work purposes. For example, a builder who buys tools or equipment can claim tax relief for these purchases. Employees must complete a P87 form to claim capital allowances. 

Key Considerations When Claiming Capital Allowances

• Ensure assets qualify before claiming. For example, leased assets and items for personal use do not qualify.

• Claim in the correct tax period to maximise relief, especially for AIA and First-Year Allowances.

• Keep accurate records of all asset purchases, including receipts, invoices, and documentation of asset usage.

If you’re unsure about eligibility or the claiming process, consulting with a tax specialist can ensure maximum benefits.

Why Capital Allowances Are Crucial for Your Business

Capital allowances are a crucial aspect of business tax planning. They allow businesses to reduce tax liabilities, encourage investment, and improve cash flow. Whether your business is purchasing machinery, upgrading to energy-efficient vehicles, or investing in R&D, capital allowances help offset the cost of these assets, giving your business more flexibility to grow. 

By understanding how to claim capital allowances and which assets qualify, you can make the most of available tax reliefs and reinvest the savings into your business. 

Conclusion: Maximise Your Business Tax Relief

Claiming capital allowances is an effective way to lower tax expenses and reinvest in business growth. With proper planning and expert guidance, businesses can take full advantage of tax reliefs available under AIA, WDA, FYA, and RDA.

Need assistance? At ASWATAX, we specialise in identifying capital allowances, ensuring businesses claim the full amount they’re entitled to. We charge only 6% of any capital allowances identified, with no fees if no allowances are found.

Get in touch today for a free initial review and maximise your tax savings!

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.