How to work out your writing down allowances
Capital allowances are quite the minefield, and while it may feel too much to wrap your head around quickly, familiarising yourself with the types of allowances you can claim can drastically reduce your tax bill.
You and yours…
One way your business can ease its tax burden is by ‘writing down allowances.’
Here, exclusively for ContractorUK, let me explore what writing down allowances are and how you can work out yours, writes Rachael Johnston of The Accountancy Partnership.
What are capital allowances?
To truly understand what writing down allowances are, we need to first establish capital allowances.
In a nutshell, capital allowances are a type of tax relief businesses can claim when they invest in long-term assets – think of things like computers or machinery and any other assets you can expect to stay in your business for longer than 12 months.
Claiming capital allowances simply means you’re able to deduct part (or in some cases all!) of an asset’s value from your company profits. In many cases, this can make a dramatic difference to how much tax you pay, given it is profits which businesses pay their tax on!
How much of an asset you can deduct from your profits may change over the years, as things like ‘wear and tear’ can see its value depreciate over time. In this case, you’ll offset a percentage of the asset value (this can be done by methods like ‘straight-line depreciation’ or ‘reducing balance depreciation’), against your corporation tax bill while it’s still in use.
Why is it useful to claim capital allowances?
The biggest reason is that it reduces your tax bill, and depending on the asset value, it can be reduced by a significant amount. You may find you can’t use all of your allowance against your tax bill. In these instances, if you still have allowance left, it produces a ‘loss’ that you can carry forward into the next tax year to reduce that year’s bill.
What are writing down allowances?
Writing down allowances are a type of capital allowance which allows you to claim relief on an asset’s value over a longer period of time. This can include assets such as plant and machinery, and commercial vehicles.
If you can’t use the AIA (Annual Investment Allowance) because you’ve either used it all up, or the asset doesn’t qualify, you can use writing down allowances instead. The AIA is another type of capital allowance, where if you purchase an asset that qualifies, you can deduct 100% of its cost when it comes to calculating your profits and how much tax you need to pay.
To work out your writing down allowances, you deduct a percentage of its value depending on which ‘pool’ it’s in. They include:
| Pool | Rate | What's included: |
| Main rate pools | 18% | This is for the majority of business assets such as office equipment, commercial vehicles, plant and machinery, and software. |
| Special rate pools | 6% | This is typically for longer-term assets like building alterations and thermal insulation. |
| Single asset pools | 6% or 18% depending on the type of asset | You might need to create a seperate pool for single assets that either have a short life, or you use outside your business (this is for sole traders or people in partnerships). It can include things like cars, items you also use outside your business, or special rate items. |
We don’t cover everything included in the pools, so check out .Gov for more information.
Working out written allowances
Once you know the value of your asset, and which pool it’s in, you’re ready to work out the writing down allowance.
The tax allowance is how much you’ll be able to claim to offset against your profits, and the ‘written down value’ will be the value of the asset -- minus the allowance.
Let’s look at an example of an asset in the ‘main rate pool’ over five years.
| Asset Value | Tax Allowance | |
| Asset Cost | £8,000 | |
| Year 1 writing down allowance = 18% of the asset cost | £1,440 | |
| Written down value: £8,000 - £1,440 | £6,560 | |
|
Year 2 WDA: 18% of the written down value |
£1,180.80 | |
| Written down value: £6,560 - 1,180.80 | £5,379.20 | |
| Year 3 WDA: 18% of written down value | £968.25 | |
| Written down value: £5,379.20 - £968.25 | £4,410.95 | |
| Year 4 WDA: 18% of the written down value | £793.97 | |
| Written down value: £4,410.95 - £793.97 | £3,616.98 | |
| Year 5 WDA: 18% of the written down value | £651.05 | |
| Written down value: £3,616.98 - £651.05 | £2,965.93 |
We understand that the above is a lot to take in! It’s best to familiarise yourself with the types of capital allowances you qualify for -- and what’s best for you in terms of tax efficiency; which is the name of the game after all.
Rachael Johnston of The Accountancy Partnership is a content writer specialising in business, finance, and software. Rachael graduated with a master's in writing in 2019 and has since worked in diverse sectors, including recruitment and accounting, copywriting, content writing, and growth hacking. Her current focus is to simplify all things business and tax, making them easy to understand for everyone.
