Did you know that you can reduce your tax bill by claiming capital allowances when you buy assets for your company? It could be anything from machines to computers and even software! Any assets you buy for your company can enjoy this benefit, allowing you to save plenty of money in the long run.
That said, if this is your first time hearing about capital allowances, or you simply want to learn more about it, you’re in the right place. Let’s shed some light on capital allowances to help you understand what it is all about:
What Are Capital Allowances?
Capital allowances are accounting provisions that allow you to reduce your taxable income by claiming capital allowances on qualifying assets. The government wants to encourage entrepreneurship and has therefore allowed companies to claim capital allowances on business assets they buy and use within their operations. The term ‘capital allowances’ refers to the type of tax relief that companies and self-employed people can claim on business assets.
Why Are Capital Allowances Beneficial?
Capital allowances are beneficial for two reasons; it helps businesses to reduce their tax, and it helps you to plan for the future. Let’s take a look at each one individually:
Tax Reduction
As you may already know, a company’s taxable income is the difference between the company’s total profits and its allowable expenses. Any unutilised allowable expenses become taxable profits and are, therefore, subject to tax. In other words, the more allowable expenses a company can claim, the lower its taxable income will be.
When it comes to capital allowances, you can claim this allowance on business assets, so you can reduce your taxable profits, which in turn reduces your tax bill.
Future Planning
By claiming capital allowances, you have the opportunity to invest in assets that will be used to generate your future profits. Capital allowances can be claimed on assets such as machinery and computers, but they can also be claimed on factory equipment that can have a long life.
This means that if you invest in a piece of equipment that can remain viable for five years, you can claim capital allowances on it over the next five years. This allows you to reduce your taxable income over the next five years and, as a result, reduces your tax bill for the next five years.
What Can I Claim with Capital Allowances?
Capital allowances can be claimed on assets that are used in your business operations. So, what types of assets can you claim them on? Here are a few examples:
- Machinery for processing, assembly, or manufacturing
- Computers, computer software, and computer peripherals
- Other electronic equipment, such as telephone exchanges and pagers
- Office furniture and fixtures
- Intellectual property, such as patents and trademarks
- Land and buildings
Anything that could help you to run your business can be eligible for a claim!
Are There Limits to Capital Allowances?
Capital allowances can be claimed on a variety of costs, but like most tax reliefs, there are limits based on the type of asset being purchased.
The most important things to know about the limit on capital allowances are that the asset must be purchased for business use, and any capital allowances claim must not exceed the capital allowance approved by HMRC.
Conclusion
Capital allowances have been put in place to encourage entrepreneurs and businesses to invest in assets and to make sure they have the necessary tools to run successful operations. And, of course, by making the most out of capital allowances, you can save plenty of money in the investments you make to grow your company! That being said, always do your research before investing and learn how you can claim capital allowance out of it.
Accountants247 Urmston helps companies meet their accounting requirement with single monthly payments! If you are looking for accountant services to help you make claims and more, get in touch with us today!
