If you're self-employed, investment in equipment and tools you need to carry out your work can qualify for tax relief. This could be anything from computers and electrical equipment, to machinery etc. Items of this nature are known as 'capital assets'.
Effectively this allows you to reduce your annual gross, and ultimately reduce the amount of tax you pay on your profits. There is a limit to how much you can claim though. This is known as the 'annual investment allowance' or 'capital allowance'.
Cars and other vehicles are a form of capital expense, but these are treated differently under the capital expenditure rules.
This guide will explain a little as to how capital allowances work, and help you to work out your tax liability
Self-employed: Annual Investment Allowance
Most investments you make towards capital assets for your business will comfortably fall under the Annual Investment Allowance (AIA) rules. Currently, the annual investment allowance is £500,000, meaning you can spend up to £500,000 on business-related expenses during any given tax year - and have the spending offset against your income tax bill.
- Example - You spend £50,000 on machinery
- Your taxable profit for the year year totals £100,000
- Deduct your expenses from the profit = £50,000
- £50,000 is the amount you pay tax on
Self-employed: Capital Expenditure Regime
Any expenditure which goes over the £500,000 threshold is dealt with under the 'capital expenditure regime'.
As a general rule of thumb, you can claim tax relief on up to 18% of the cost of the capital expense, each year. This is often referred to as 'Writing Down Allowance' (WDA)
- Example - You spend a total of £510,000 on capital expenses
- £500,000 IS 'tax free' as per the AIA
- £10,000 remaining falls under the capital expenditure regime
- You can claim 18% relief on it's cost in the first year: £1,800
- 18% of £1,800 = £324 relief for the first year
- The remaining sum of £8,200 can be written off over the following year(s) at the same rate: 18% of £8,200 = £1,476 ...and so on
Cars and Vehicles
Cars and vehicles are treated under the same rules for capital expenditure, and do not count towards your AIA. However, if the car is below a certain amount of carbon emissions, you will be able to reclaim for 100% of the cost under a 'first year allowance'. If the emissions are above the specified limit, you will simply be able to claim 18% of the cost per year, as outlined in the example above.
If the vehicle is used solely for business purposes, the relevant tax-free amount is permitted. If it's also used for personal use though, the eligible sum would need to be calculated pro-rata.