Different Types of Capital Allowances

Capital allowances are a (horrendously) complex area of UK tax, but claiming allowances wherever possible can help a business to make a big dent in its tax bill.

To make things extra confusing, there are different types of capital allowances available, with their own rules, claim limits, and thresholds.

Our Beginners Guide to Capital Allowances starts with the basics, or carry on reading to learn more about what types of capital allowances there are:

• Annual investment allowance
• First year allowances
• Super-deduction
• Special rate
• Writing down allowances

What is the annual investment allowance (AIA)?

The annual investment allowance (AIA) allows businesses to claim tax breaks on assets purchased. You can use it to deduct the entire value of an asset from your profits before taxes.

Is there a limit to how much annual investment allowance I can claim?

Yes, there is! You can normally claim the AIA up to a maximum limit of £200,000 in a year. This has been temporarily increased to £1,000,000 as a way of stimulating business investment. You might use it on one big mega asset, or across several. The temporary limit is in place until 31st March 2023.

When can I claim AIA for an asset?

You can only claim the annual investment allowance for an asset in the financial period that you bought the item. For AIA purposes, the date of purchase is either:

• The date you signed the contract if payment is due within 4 months
• When the payment is due, if it’s due more than 4 months later

What about if I’m VAT-registered?

If your company is VAT registered, you can usually reclaim any VAT paid on purchases. This means you’ll claim the VAT back via your VAT return, and then the annual investment allowance on the remainder.

Annual Investment Allowance (AIA) at a glance

• Deduct 100% of an asset’s value
• Claim up to £1 million in a year

What are first year allowances (FYA)?

First year allowances, like annual investment allowances, allow you to claim up to 100% of the value of an asset (FYA). The difference is that these items must be ‘qualifying.’

First-year allowance assets are typically environmentally friendly items such as:

• New zero-emission goods vehicles
• New plant and machinery for use in designated areas within certain enterprise zones
• Certain new energy-saving and water-efficient equipment
• New cars with carbon dioxide emissions of 75gms per km or less
• Specific new vehicle gas refuelling equipment

You can claim first year allowances for these items as well as the annual investment allowance. They don’t count towards the AIA limit – happy days.

First Year Allowances (FYA) at a glance

• Deduct 100% of an asset’s value
• Claim FYA as well as the annual investment allowance

What is the super deduction?

The super deduction is a type of capital allowance that is valid until March 31, 2023. Instead of claiming 100% of an asset’s value, you can claim 130% with the super deduction. It can only be used for:

• It is available to organisations that pay corporation tax, such as limited companies, but not to sole proprietors or partnerships.
• Qualifying assets purchased between 1 April 2021 and 31 March 2023 using the capital allowance definition of a purchase date.

There is no cap on the super deduction, unlike the AIA, which has a £1 million limit.

What is the Special Rate allowance?

The Special Rate (SR) allowance is a super deduction alternative for assets that do not qualify for the main rate pool (we explain how ‘pools’ work below!)

This category includes assets that qualify for the 6% special rate pool, such as building integral features and long-life assets.

Businesses can deduct 50% of the qualifying cost in the first year, with the remaining balance going into the special rate pool for subsequent tax years.

The special rate allowance, like the super deduction, has no limit.

Writing down allowances

If you are unable to use the annual investment allowance, you can use ‘writing down allowances.’ This could be because you’ve exhausted your AIA or the asset does not qualify for the annual investment allowance.

When claiming writing down allowances, assets are assigned to what HMRC refers to as ‘pools.’ These determine the allowance rate that the asset is eligible for. The various pools reflect the types of wear, tear, and depreciation that an asset may experience.