What are capital allowances?

This entry was last updated on 13 July 2016.

Definition of capital allowances

Capital allowances are a means of saving tax when your business buys a capital asset.

Your business pays tax on its profit, which is its income less its day-to-day running costs - but not all these running costs are 'allowable for tax'. If a cost is not allowable for tax, it has to be added back to the profit before tax is worked out.

When your business buys a capital asset, this is a larger investment than a regular day-to-day running cost. A proportion of the asset's value is shown as a day-to-day running cost, reducing your business's profit, for each year it'll be useful to the business. This is called 'depreciation' for most capital assets.

Because the cost of depreciation isn't allowable for tax, capital allowances compensate for this by letting the business deduct the capital allowance from its profit before working out the tax.

Capital allowances may apply to both tangible capital assets and intangible ones (like the purchase of a patent, for example). Find out more about tangible and intangible capital assets.

For more details, read about capital assets at HMRC's website

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FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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