Capital Allowances for Sole Traders Made Simple
When you buy a laptop, a camera, tools or a van for your business, how do you get tax relief on it? For UK sole traders the answer depends mostly on one thing: whether you use the cash basis or traditional accounting. This guide explains capital allowances in plain English, when you need them and when you simply claim an expense. It is general information, not tax advice; the rules can change each tax year, so check GOV.UK or an accountant for your situation.
Key takeaways
- Capital allowances give tax relief on business assets you keep and use, such as equipment, machinery and vehicles.
- Under the cash basis, the default for most sole traders, most equipment is simply claimed as an expense. Cars are the main exception.
- Under traditional accounting, equipment usually goes through capital allowances, and the Annual Investment Allowance often gives full relief in the year of purchase.
- Cars do not qualify for the Annual Investment Allowance and use writing down allowances instead.
- If you use an asset personally too, you only get relief on the business share.
Most freelancers and sole traders buy some equipment: a computer, a phone, software, a desk, tools of the trade or a vehicle. These are different from day-to-day running costs because they last for years. Tax rules have a separate system for them, called capital allowances, and many people find the name more intimidating than the reality.
This guide focuses on sole traders and partnerships of individuals filing Self Assessment. Limited companies use capital allowances too, but they have some reliefs that sole traders do not, so the details differ.
What capital allowances are
In your business accounts, you cannot normally deduct the cost of a long-lasting asset in the same way as, say, a software subscription or printer paper. Accountants spread that cost over the asset's life through depreciation. For tax, depreciation is not allowed as a deduction. Instead, HMRC gives its own relief through capital allowances.
The type of assets that usually qualify is called plant and machinery. Despite the name, it covers far more than factory equipment:
- Computers, laptops, tablets, phones and monitors
- Cameras, lighting, audio and production gear
- Office furniture such as desks and chairs
- Tools and machinery used in a trade
- Vans, lorries and other business vehicles
- Cars, which have their own rules
Some things do not qualify for plant and machinery allowances, such as land, most buildings and items you lease rather than buy. Leased equipment is usually handled as a running cost instead.
Cash basis: why most sole traders rarely need them
Since 6 April 2024, the cash basis has been the default for sole traders and partnerships without corporate partners. You record income when money comes in and expenses when money goes out. You can opt out and use traditional accounting if it suits you better.
Under the cash basis, most equipment purchases are treated simply as business expenses. If you pay for a new laptop that you use only for work, you include the cost in your expenses for the year you paid for it. You do not need to calculate capital allowances at all.
The main exception is cars. Even under the cash basis, you claim tax relief on a car you buy through capital allowances rather than as an expense, unless you use the simplified mileage rate for it instead. Some other items, such as land and buildings, are not deductible as expenses under the cash basis either.
Pro tip
Before you spend time on capital allowance calculations, check which accounting method you are using. If you are on the cash basis and your purchase is not a car, you can usually record it as an ordinary expense in your bookkeeping software and move on.
Traditional accounting and the Annual Investment Allowance
If you use traditional (accruals) accounting, perhaps because you hold stock or need full accounts for a lender, equipment usually goes through capital allowances. That sounds like more work, but for most small businesses one relief does almost everything.
The Annual Investment Allowance (AIA) lets you deduct the full cost of qualifying plant and machinery from your profits in the year you buy it, up to a generous annual limit.
Very few sole traders get close to that limit, so in practice the AIA usually means equipment gets full relief in the year of purchase, much like an expense. The difference is mainly in how it appears on your tax return: it sits in the capital allowances boxes rather than in your expenses.
Where the AIA does not apply, for example for cars, or if you choose not to claim it, you use writing down allowances. These give relief on a percentage of the remaining value each year, so the cost is spread over several years. The rates depend on the type of asset and can change, so check GOV.UK for the current figures.
- List the asset. Record what you bought, the date and the cost, and keep the invoice.
- Decide if it qualifies. Check it is plant and machinery used in your business, not a running cost or a building.
- Choose the relief. For most equipment, claim the AIA. For a car, use writing down allowances.
- Adjust for private use. Reduce the claim to the business share if you also use it personally.
- Enter it on your return. Include the figures in the capital allowances section of your Self Assessment.
Cars: the special case
Cars cause more confusion than any other asset, for three reasons.
No Annual Investment Allowance
Cars do not qualify for the AIA, whichever accounting method you use. Relief is given through writing down allowances, with the rate depending on the car's CO2 emissions. Vans and other goods vehicles are not treated as cars here and can usually qualify for the AIA.
Mileage rate or actual costs
Sole traders can choose simplified expenses for vehicles instead: 45p a mile for the first 10,000 business miles in a car or goods vehicle and 25p after that. If you use the mileage rate, you cannot also claim capital allowances or running costs such as fuel and insurance for that vehicle. Once you use the flat rate for a vehicle, you must keep using it for that vehicle.
Private use
Most sole traders use their car for personal journeys too. You can only claim the business share of the allowances, so you need a reasonable record of business and private mileage.
Example
Imagine a self-employed electrician who buys a used van and a new laptop in the same tax year, and uses traditional accounting. The van and laptop both qualify for the Annual Investment Allowance. He uses the van about 90% for work, so he claims 90% of the van's allowance and 100% of the laptop's, since the laptop is used only for the business. If he had bought a car rather than a van, he would use writing down allowances instead. The percentages here are made up to illustrate the method.
Common mistake
Claiming the mileage rate for a car and also claiming capital allowances on the same car. It is one or the other. Decide when you start using the vehicle for business, because the choice for that vehicle is effectively locked in.
Selling or stopping using an asset
Capital allowances do not end when you buy something. If you later sell, give away or stop using an asset in your business, you may need to account for it.
- Selling equipment. If you sell an item you claimed allowances on, the sale value usually goes back into the calculation. If you have already had full relief, this can create a balancing charge, which adds to your taxable profit.
- Taking it for personal use. If you keep a business laptop for yourself, its market value is generally treated as if you had sold it.
- Closing the business. When you stop trading, the remaining assets need to be dealt with in your final return.
Under the cash basis there are similar rules: if you sell equipment you claimed as an expense, the proceeds are generally treated as business income. Keep records of what you sold and for how much.
Keeping track of your assets
A simple asset register saves a lot of confusion later. It can be one tab in a spreadsheet or a feature in your bookkeeping software.
| Column | What to record |
|---|---|
| Asset | Description, for example "laptop" or "transit van" |
| Date bought | The purchase date from the invoice |
| Cost | The amount you paid |
| Business use | The business share if it is also used personally |
| Relief claimed | Expense, AIA or writing down allowances, and in which tax year |
| Disposal | Date and amount if sold, scrapped or taken for personal use |
Capital allowances checklist
- Confirm whether you use the cash basis or traditional accounting
- Set up a simple asset register for equipment and vehicles
- Keep invoices for every asset you buy
- Decide on mileage rate or actual costs for each vehicle
- Estimate the business share for anything you also use personally
- Record any sales or disposals of business assets
- Check current rates and rules on GOV.UK before filing
Frequently asked questions
Can I claim capital allowances on equipment I owned before I started trading?
Often yes. If you bring an item you already own into the business, such as a laptop, you may be able to claim based on its market value when you started using it for the business. Check the rules on GOV.UK or with an accountant, since the treatment depends on your accounting method.
Is a mobile phone plant and machinery?
A phone handset you buy for the business is generally treated as equipment. Under the cash basis you would usually claim it as an expense. The monthly contract is a running cost, not a capital item. Claim only the business share if you use it personally.
Can I claim full expensing as a sole trader?
Full expensing is a relief for companies, not for sole traders. Sole traders generally rely on the Annual Investment Allowance, which covers most small business equipment purchases in full.
Related reading
The bottom line
For most sole traders on the cash basis, capital allowances only really matter for cars: everything else is usually an ordinary expense. If you use traditional accounting, the Annual Investment Allowance normally gives full relief on equipment in the year you buy it, and writing down allowances handle cars. Track your assets, adjust for private use and keep the invoices.
This is general information, not tax advice. Allowance rates and rules change, so confirm the current position on GOV.UK or with an accountant before you make a large purchase or file your return.
