Capital Allowance Calculations

Capital Allowance Calculations

If you run your own business, any investments into things that you need to do your work – such as machinery and computers – can qualify as tax deductable. These items are called ‘capital assets’. The tax relief helps lower the bill for income tax at the end of the year, and also and means you pay less tax on your profits.

The amount you are entitled to claim is limited. It’s known as the ‘annual investment allowance’ or the capital allowance, but the rules differ for people who invest more. The following guide explains the way capital allowances work, and how you can work out your tax liability with them.

Annual Investment Allowance

For the majority of investments in capital assets to run your business, your limit will be below the rules of annual investment allowance (AIA). These rules look like this:

  • The annual investment allowance is £200,000 for 2017-18.
  • This hasn’t changed from 2016-17

These rules allow you to spend anything up to £200,000 on expenses related to your business during the tax year, then offset what you spend against your income tax liability. For example:

  • You invest £20,000 on hardware for your business
  • The profit you need to pay tax on for the year is £100,000
  • You only have to pay tax on £80,000 (the £20,000 expenditure is deducted from the taxable income)

Capital Expenditure Regime

Expenditure in excess of £200,000 falls under the ‘capital expenditure regime’, instead of the annual investment allowance. With capital allowances, there is a general rule that every year you can claim tax relief on a maximum of 18% of the amount spent on the capital item. This is often referred to as the writing down allowance, or WDA. For example:

You purchased some equipment that cost £210,000 (£10,000 over the annual investment allowance) for use in your business. Therefore, you could claim tax relief on 18% of that cost in the first year (that’s £1,800).

So in the year 2017-18, this could mean a saving of £324 (18% of £1,800).

The remaining £8,200 of the cost is left to be written off, so the following year you would claim tax relief on 18% of £8,200, and so on year after year.

These rules typically apply to cars, rather than them being counted towards AIA. If the car’s carbon emissions are below a specified threshold, you can claim 100% of the vehicle’s cost under a ‘first year allowance’. If the emission levels come above the threshold, you can claim the 18% of the cost per year.

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