Why equipment isn't just a normal expense
Most costs your company pays, like stock, wages or your phone bill, come straight off your profit the moment you spend the money. Equipment is different. When you buy something you'll keep and use for years, that's a capital cost. Think of a laptop, a drill, a coffee machine or a desk. The tax rules give you relief for it through something called capital allowances instead of treating it as an everyday bill.
That sounds like extra work, but for almost every small company it ends the same way: the money you spent comes off your profit, so you pay less tax. It just travels through a different door.
What is the Annual Investment Allowance?
The Annual Investment Allowance is the door most of your equipment goes through. It lets you take the whole cost of qualifying equipment off your profit in the year you buy it, up to £1 million of equipment a year.
A £1 million yearly limit is far more than a typical small company spends on kit, so in practice you get all of it back against your profit, in one go, the same year. You don't have to drip the cost out over several years.
A real example: buying a £2,000 laptop
Say your company buys a £2,000 laptop this year to do the work.
- The full £2,000 comes off your profit this year through the Annual Investment Allowance.
- If your profit before the laptop was £20,000, it's now £18,000.
- You only pay Corporation Tax on the £18,000.
So the laptop cuts your tax the same year you bought it, just like a normal cost would. The same goes for a £500 set of tools, a £4,000 machine, or £900 of office furniture.
What counts as "equipment" for this?
The kind of equipment that goes through the Annual Investment Allowance is the stuff you buy to keep and use in the business:
- Computers and tech: laptops, monitors, printers, phones you keep.
- Tools: anything from hand tools to a workshop full of kit.
- Machinery: the equipment that makes or does the thing you sell.
- Office furniture: desks, chairs, shelving, storage.
- Vans and lorries: a van counts as equipment here (a car does not, more on that below).
If you bought it to use it, not to sell it on, and you'll have it for a while, it usually goes through this allowance.
Cars are the big exception
A car is the one thing the Annual Investment Allowance leaves out. But there are two very different outcomes, and which one you get depends on the car. This is the bit that costs people money if they get it wrong, so it's worth a careful read.
A brand-new, fully electric car (zero emissions): you get the whole cost off your profit in the year you buy it, just like a laptop. This is a special 100% first-year allowance. It only counts when the car is new and unused: buy the same electric car second-hand and you don't get it. So a director buying a new EV through the company gets the full deduction straight away.
Any other car (petrol, diesel, hybrid, or a second-hand electric one): the relief comes slowly, spread over several years, not all at once. How fast you get it depends on how much CO2 the car gives off. Cleaner cars get the relief quicker.
A van is not treated as a car for this. A van still goes through the normal equipment allowance and gets the full amount in the year you buy it. If you're buying any kind of vehicle, this is the bit worth getting right, and we sort which rule applies for you.
Depreciation vs capital allowances (two words for a similar idea)
You might see the word "depreciation" in your accounts. It means spreading an asset's cost over the years it lasts, a way of showing the kit slowly wearing out. That's the accounts version.
For tax, we ignore depreciation, we add it back, and use capital allowances instead. They're the tax world's version of the same idea. You don't pick between them or work out the swap. We handle that part so the right figure lands in the right place.
Do I have to keep the receipt?
Yes. Keep a record of what you bought, the date, and what you paid, and hang onto it for six years from the end of the accounting period it falls in. If HMRC ever asks, you can show the equipment was real and the allowance was right.
How SimpleReturns handles it
Connect your bank or upload a statement, and we spot the equipment you bought, apply the Annual Investment Allowance, and take the right amount off your profit. If you've bought a car, we pick the right rule for it: a new electric car gets its full cost off in year one, while other cars go on the slower year-by-year track. You see every figure before anything is sent, and you never have to work out which allowance or which box anything goes in.