Capital allowance is a tax relief that enables self-employed workers and businesses in the UK to deduct the cost of certain business-related assets from their taxable profits. With the capital allowance, self-employed individuals can cut down their overall tax liability and can invest in necessary equipment and infrastructure instead. Therefore, understanding how to claim capital allowance for self-employed workers is essential to make the most of available tax benefits.
AccountingFirms makes it seamless to search for the best fit for your accounting and taxation needs by applying filters and getting the most customised result. Let’s hire the best accountant now!
How to claim capital allowance for self-employed workers?
The following steps elaborate on how to claim capital allowance for self-employed workers in the UK:
Identify eligible business Assets:
First things first, a self-employed worker must know that not all the expenses that you incur for purely business purposes qualify for capital allowances. Consequently, only certain business-related equipment, tools, or machinery fall under the ambit of capital allowance.
According to HMRC, the items or assets you can claim capital allowances on are known as plant and machinery, which include:
- Machinery and equipment (e.g., computers, tools, office furniture).
- Business vehicles (e.g., vans, lorries, cars used for work purposes).
- Plant and machinery used in business operations.
- Renovations and improvements to business premises (in some cases).
On the flip side, the capital assets that are ineligible for capital allowances or the plant and machinery that cannot be claimed under the HMRC guidelines include:
- Business running costs (e.g., rent, salaries, stock purchases).
- Cars that are used for both personal and business use.
- Things you lease unless you own them
- Items used only for business entertainment, like a yacht or karaoke machine
- Land.
- Structures, including bridges, roads, and docks.
- Buildings, such as doors, gates, shutters, mains water and gas systems.
Identify which type of allowance would benefit your business:
Fortunately, HMRC facilitates businesses by providing various types of capital allowances, including Annual Investment Allowance (AIA), First-Year Allowance (FYA), and Writing Down Allowance (WDA).
Through these schemes, self-employed workers can conveniently and seamlessly claim capital allowances depending on the type of asset and business expenditure. For instance, with Annual Investment Allowance (AIA), businesses can deduct 100% of costs on qualifying plants and machinery up to a specified limit in the same tax year.
Likewise, under the First-Year Allowance (FYA), businesses can claim 100% tax relief on energy-efficient and environmentally friendly equipment since the FYA scheme encourages businesses to invest in environmentally sustainable assets.
Lastly, for assets that either do not qualify for AIA or exceed the AIA threshold, the Writing Down Allowance (WDA) is applicable to them.
To take a deeper dive into the types of capital allowance, read our guide: What is the capital allowance for self-employed workers?
Calculate your capital allowance:
After determining the type of allowance you can claim on your assets, it is time to calculate the amount you can deduct from your taxable profits in order to trim down your tax bill.
Let’s understand this with the help of the following example:
- A self-employed worker purchases machinery that is necessary for the running of their business at the cost of £50,000.
- Now, if they sign up for AIA, they can deduct the full £50,000 from taxable income.
- Conversely, consider that the self-employed individual chooses to use the Writing Down Allowance (WDA) scheme, under which they can claim tax relief on the assets’ value contained in the pool, known as the general pool. Notably, WDA’s main rate pool is the normal WDA of 18%, applying to the expenditure of most plants and machinery in the general pool. Coming back to the WDA, If they opt to use WDA (18%), they can claim £9,000 (£50,000 × 18%) in the first year.
Record the asset purchase:
Maintaining accurate financial records is another essential step in understanding how to claim a capital allowance for self-employed workers. To clarify, self-employed individuals must keep the receipts and invoices of all the assets they purchase.
Similarly, keeping details of the asset’s use is also significant, such as you must mention whether the certain asset was used for business or personal purposes. Lastly, you must also keep records of tax returns and allowances claimed.
Report the allowance on self-assessment tax return:
Finally, to claim capital allowances, self-employed individuals must report them in their Self-Assessment tax return.
To achieve the purpose, they will first:
- Log in to HMRC’s online portal.
- Next, go to the Self-Assessment section and select “Business Income”.
- Thereafter, you will enter capital allowance claims under the appropriate category.
- It is advised that you check HMRC guidelines to ensure you have reported correct figures.
It is worth mentioning that submitting the tax returns on time is utterly important to avoid the penalties from HMRC. If you are submitting an online tax return, you must do it by midnight on January 31, 2025. On the contrary, if you want HMRC to automatically collect the tax you owe on your wages and pension, complete your online form by December 30.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
Final word:
All in all, coming to grips with how to claim capital allowance for self-employed can considerably help them reduce their taxable profits and alleviate the financial burden of investing in necessary business machinery and equipment.
However, dealing with the complexities involved in capital allowance claims can be a taxing and effortful for a self-employed worker since they are solely responsible for running and thriving their business. To this end, hiring an affordable and location-based accountant from Accountingfirms can be of immense help.
Notably, a proficient accountant can ensure that all your tax obligations, including registering your business with HMRC and claiming the right allowances, are fulfilled efficiently.
What’s more, a professional accountant registered with us can offer you tailored and thorough consultation so you can make informed financial decisions while optimizing your tax relief claims. Hence, without delaying any further, contact us today.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.