Year-End Tax Planning: Using Capital Allowances to Reduce Your Business Tax Bill
The end of your accounting period is one of the most important times for tax planning. By reviewing planned purchases before your year end, you may be able to accelerate tax relief and reduce your taxable profits.
One of the most effective ways to do this is by claiming capital allowances on equipment and business assets.
Timing Asset Purchases for Tax Relief
If your business plans to buy equipment, bringing the purchase forward to before the end of the accounting period may allow you to claim tax relief earlier.
This can reduce your taxable profits for the current year, potentially lowering your tax bill or improving cash flow.
Capital Allowances for Companies
Companies can currently benefit from full expensing, which allows 100% of the cost of qualifying new plant and machinery to be deducted from taxable profits in the year of purchase.
Qualifying assets typically include:
- Machinery and manufacturing equipment
- Tools and business equipment
- IT systems and computers
- Commercial vehicles such as vans and trucks
Cars generally do not qualify for full expensing, although special rules apply for zero-emission vehicles.
Full expensing has replaced the previous super-deduction scheme, which ended in March 2023.
Special Rate Assets
Some assets that are installed within buildings qualify for a 50% first-year allowance instead of full expensing.
These are known as special rate assets and commonly include:
- Lifts and escalators
- Air-conditioning systems
- Electrical systems
- Water systems
- Heating and ventilation systems
These assets would normally only qualify for a writing-down allowance of 6% per year, so claiming the first-year allowance can significantly accelerate tax relief.
Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) allows businesses to deduct 100% of the cost of qualifying plant and machinery in the year of purchase.
Key features include:
- Annual limit of £1 million
- Available to companies, sole traders and partnerships
- Applies to new and second-hand equipment
For many smaller businesses, the AIA provides the most straightforward way to claim immediate tax relief on equipment purchases.
Structures and Buildings Allowance (SBA)
Where your business incurs costs constructing, renovating or converting commercial buildings, the expenditure may qualify for the Structures and Buildings Allowance (SBA).
The SBA currently provides tax relief at a rate of 3% per year on qualifying construction costs.
However, certain costs do not qualify, including:
- Residential accommodation
- Land purchases
- Planning permission costs
Although the relief is spread over several years, it can still provide valuable tax savings on large commercial property projects.
Planning Capital Expenditure
Before making significant investments, it is important to review:
- Whether the asset qualifies for full expensing, AIA or special rate allowances
- The timing of the purchase relative to your accounting year end
- The impact on taxable profits and cash flow
With corporation tax rates now reaching up to 25%, maximising capital allowance claims has become increasingly important for businesses investing in growth.
Action Point
Before the end of your accounting period, review any planned equipment or asset purchases to ensure you maximise the capital allowances available.
Need Advice on Capital Allowances?
Determining which assets qualify for specific tax reliefs can be complex.
At Merranti Accounting, we help businesses:
- Identify qualifying capital expenditure
- Maximise capital allowance claims
- Reduce corporation tax liabilities
- Plan investments tax-efficiently
If you are considering a major purchase or investment, speak to us first to ensure you claim the maximum tax relief available.
