Self-employed capital allowances

What is a self-employed capital allowance?

If you're running your own business, the investment you make in the tools you need to carry out your work - such as computers or machinery - can qualify for tax relief.

These items are known as 'capital assets', and are taxed differently to other tax-deductible expenses.

This relief means that you can effectively pay less tax, as some or all of what you've had to spend on these 'capital assets' can be deducted from your profit - and that's what you're taxed on.

There is a limit to how much you can claim. This is known as your capital allowance or 'annual investment allowance'.

Cars are also a form of capital expenditure that you can claim for, although these are treated differently - more on that below.

• Get a head start on your 2023-24 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

What can be claimed under the capital allowance?

If you're not sure what's a capital allowance, and what's a business expense, gov.uk describes items you can claim as capital allowances as 'assets that you keep to use in your business'. This includes things like:

• plant and machinery - which includes equipment, machinery and business vehicles
• research and development
• structure and buildings - build, buy or lease a structure and all construction contracts were signed on or after 29 October 2018
• patents
• 'know-how' - i.e. intellectual property
• extracting minerals
• dredging.

What can't you claim for?

The term 'plant and machinery' is pretty broad, and can be applied to a lot of items - from 'integral features' like lifts and air-conditioning systems, and some fixtures like fitted kitchens, to the costs of demolishing these things.

However, it's also important to bear in mind what you can't claim for - this includes:

• anything you lease - you must own an item/vehicle/property to claim capital allowances
• buildings - including parts of buildings that include doors, gates, mains water and gas systems
• land and structures, including bridges and roads
• items used for business entertainment - gov.uk includes a karaoke machine in this category.

How much is the self-employed annual investment allowance?

The annual investment allowance for sole traders, partners and limited companies is £1m - it had temporarily been raised to this level since 2019, but the government announced it would remain at £1m permanently in the 2023 Spring Budget.

Under these rules, you can only claim AIA during the accounting period when you bought the item - this will either count as the date you signed the contract if the item had to be paid for within four months, or the date when payment is due if it was due more than four months later.

Using the AIA can work like this:

• You spend £20,000 machinery for your business
• Your taxable profit for the year is £100,000
• You only need to pay tax on £80,000 (£100,000 minus £20,000).

Self-employed: writing down capital allowances

The 'writing down allowance' can be used if you've spent more than your annual investment allowance limit on capital assets, or if the item doesn't qualify for AIA (eg. cars, gifts or items you already owned before you started using them in your business).

It works by allowing you to deduct a percentage of the value from your profit each year, giving you some tax relief.

This percentage you can deduct depends on what the item is.

How to claim writing down allowances

• Work out the value of the item - usually what you paid for it. If it was a gift or you already owned it, use the market value.
• Group things you've bought into 'pools' based on the percentage rate they qualify for - the main rate pool gets 18%; the special rate pool gets 6%; single asset pools vary between the two depending on the item.
• The amount left in each pool becomes the starting balance for the next accounting period.

Writing down allowances: an example

You bought solar panels for your business costing £10,000.

This kind of expense qualifies for the special rate pool, so you can claim tax relief on 6% of its cost in the first year - in this case, 6% is £600.

So in the 2024-25 tax year, this could save you £120 (20% basic rate tax on £600).

That leaves £9,400 of the cost still to be written off, so the next year you could claim tax relief on 6% x £9,400 (£564), and so on each year.

Using capital allowances for business cars

Business cars are also treated under the writing down allowances rules - they cannot be included in your AIA.

There are three different allowances you can claim when you buy a car for business purposes.

The year the car was bought, and whether it is new or second hand also have a bearing on the allowances you can claim.

• First-year allowances - applies to some vehicles with low CO2 emissions. You'll be able to claim 100% of the cost.
• Main rate allowances - applies to most vehicles. You'll be able to claim 18% of the costs.
• Special rate allowances - applies to vehicles with CO2 emissions above 50g/km. You'll be able to claim 6% of the cost.

Rates for cars

You can use the arrows in the table below to scroll to find the regulations that apply to you, based on when the car was bought.

If you're a sole trader or a partner, and also use the car for personal use, you'll need to work out what you can claim based on how much you spend to use the vehicle for business use.

Submit your 2023-24 tax return with Which?

Get a head start on your 2023-24 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.