Small business guide: Tax breaks when buying a new asset

If you purchase a new asset for your business this year, you could be entitled to tax breaks.

Thanks to capital allowance tax breaks, you could deduct the full cost of qualifying vehicles, machinery and equipment from your taxable profits, saving you up to 25% on the cost of your new asset.

What are capital allowances?

Capital allowances are a type of tax relief for businesses. They let you deduct some or all of the value of an item from your profits before you pay tax.

You can claim capital allowances on items you keep to use in your business. Here we focus solely on plant and machinery allowances, which covers equipment, machinery and business vehicles.

Generally, in order to be able to claim capital allowances on an asset, you have to own the asset you are seeking finance for - either by paying cash or using hire purchase). Please seek advice from your accountant.

Types of capital allowances

The capital allowances (also known as plant and machinery allowances) are:

• Annual investment allowance
• 100% first-year allowances
• Full expensing and 50% first-year allowance
• Writing down allowances

If an item qualifies for more than one capital allowance, you can choose which one to use. If you are unsure, please speak to an accountant or tax advisor. Funding Circle does not provide financial, legal or tax advice.

Annual investment allowance

When your business buys a qualifying piece of plant or machinery, you can deduct the full cost of the item from your profit before tax.

You can claim the annual investment allowance (AIA) on most plant and machinery up to £1 million.

100% first-year allowance

Certain new and unused equipment qualifies for 100% first-year allowance in the year that it was bought. You can deduct the full cost of these items from your pre-tax profits.

Items that qualify include electric cars and zero-emission goods vehicles. You can find the full list of qualifying items here.

You can claim 100% first-year allowance in addition to AIA, but not for the same asset.

Full expensing and 50% first-year allowance

Full expensing lets companies deduct 100% of the cost of qualifying plant and machinery from their profits before tax in the year it was bought.

This effectively reduces the cost of your new asset by up to 25%, depending on your rate of corporation tax. So, for example, if your corporation tax rate is 25%, for every pound you spend on capital expenditure, you will pay 25p less tax.

The 50% first-year allowance applies to special rate plant and machinery. It lets companies deduct 50% of the cost from their profits before tax in the year it was bought.

You cannot claim both full expensing and 50% first-year allowances against the same expenditure.

Introduced in 2023 and made permanent in 2024, full expensing is similar to AIA, but there are some restrictions and key differences:

• Only assets purchased after 1st April 2023 qualify
• Full expensing is only available to businesses that are subject to corporation tax
• Unlike AIA, there is no cap on expenditure

Writing down allowances

If your plant and machinery spend doesn't qualify for AIA or you've already claimed the maximum amount, you can claim writing down allowances.

Writing down allowances allows you to deduct a percentage of the value of certain items from your profits each year. They are more complicated than other capital allowances. You can find out more information here.

Asset finance could save you up to 50%

Last year, almost all of our customers got a cheaper deal with asset finance compared to a term loan.

So if you're in the market for a new piece of equipment, machinery or vehicle, apply online in minutes to see how much you could save with an asset finance deal.

Please note, tax relief depends on your business type and the asset you want to finance. More information can be found at gov.uk/capital-allowances. If you are unsure please speak to an accountant or tax advisor. Funding Circle does not provide financial, legal or tax advice.

01/07/25: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.

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