Capital Allowances: Why You Cannot Just Expense That Laptop

Running costs versus capital

A running cost is consumed in the business: stationery, software subscriptions, travel, insurance. You deduct it from profit in the year you incur it.

A capital purchase is something you buy to keep and use over time: a laptop, a camera, machinery, a van. You cannot deduct it as an ordinary expense. You claim capital allowances against it instead.

Annual Investment Allowance

AIA lets you deduct the full cost of qualifying plant and machinery in the year of purchase, up to an annual limit. For most sole traders buying a laptop or some tools, AIA means the practical effect is the same as expensing it.

The limit has been changed repeatedly, including temporary increases, so confirm the current figure before relying on it for a large purchase.

Cars are excluded from AIA. That exclusion is the single most common mistake in this area.

Writing Down Allowance

Anything not covered by AIA goes into a pool and attracts a Writing Down Allowance: a percentage of the remaining pool balance each year, so relief arrives gradually rather than all at once.

Cars go into a main rate or special rate pool depending on their CO2 emissions, which is why two cars at the same price can give very different relief. Check the emissions bands before buying if the tax treatment matters to your decision.

Private use and disposals

If an asset has private use, the allowance is restricted to the business proportion. A laptop used half for personal things gets half the relief, and you should record the basis for that split.

When you sell or scrap an asset you have claimed on, there is a balancing adjustment, which can increase your taxable profit in the year of disposal. Keeping an asset register, with what you paid and what you claimed, is what makes that calculation possible years later.