When you buy equipment for your business, HMRC normally doesn’t treat it as a day-to-day business expense. Instead, it’s usually classed as a ‘capital expenditure’. 

That matters because capital expenditure isn’t deducted straight away like a phone bill or software subscription. Instead, HMRC gives tax relief through a system called capital allowances.

What is a capital expenditure?

Capital expenditure is money spent on assets that help your business generate income over the long term, rather than covering day-to-day running costs. 

The main difference is that if it lasts and supports the business over time, HMRC normally treats it as capital expenditure rather than day-to-day expenses.

Now that we’ve covered what it is, let’s move on to how you can use it to get tax relief.

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How can Sole Traders get tax relief on equipment?

There are three main ways Sole Traders can claim tax relief on equipment, depending on the type of asset and how much relief they’ve already claimed.

Now that we’ve covered a brief overview of the options available to reclaim tax on equipment, let’s dig into what each one is. Including how Sole Traders can reclaim tax on equipment bought for their business.
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Annual Investment Allowance - what is it? 

It’s HMRC’s main way of giving tax relief on business equipment. It lets you deduct the full cost of qualifying equipment from your taxable profits in the same tax year up to the £1 million limit. So, instead of spreading relief over several years, you get it upfront. 

What does it cover?

Now that you understand what it is, let’s get into the meat of it. What can AIA be used against?

Typical qualifying items include:

• Laptops and computers.
• Tools and trade equipment.
• Office furniture.
• Machinery used in your business.

Things it doesn’t cover includes cars (these follow a separate capital allowance rule), items with significant personal use, and certain leased assets.

Examples of AIA in action

To make it clearer, here is an example of how Annual Investment Allowance could be used in a business:

How to claim Annual Investment Allowance (AIA) in practice

You’ll be relieved to hear that it isn’t done as a separate process. AIA is claimed as part of your tax return. 

How do you do it?

To claim Annual Investment Allowance in your tax return, you need to first keep a record of the purchase. Including the invoice, receipt, and when it was first used for business.

Next, you need to record it as a capital asset in your bookkeeping. There’s a section within the Self Assessment tax return for capital allowances, this is where you mention what you’re claiming. 

Most accountants (like Crunch) can handle this for you, as long as the purchase is correctly marked as qualifying equipment. 
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The 40% First-Year Allowance (FYA)

There’s been a lot of hype around the 40% First-Year Allowance recently, mainly because it’s a relatively new addition to HMRC’s capital allowances system. 

What is this new 40% tax relief?

The 40% First-Year Allowance is a type of HMRC capital allowance that lets you deduct 40% of the cost of certain qualifying main-rate plant and machinery in the first year.

Unlike AIA, it does not give full relief straight away. Instead, it gives you a partial upfront deduction, with the remaining cost carried forward into your capital allowances pool for future years. It’s designed as an additional investment incentive for specific qualifying business assets.

When would you use FYA? 

In most cases, Sole Traders will tend to use AIA first, because it gives 100% tax relief upfront. The 40% First-Year Allowance only really tends to come into play when:

• You’ve already used the £1 million AIA limit, or
• The asset doesn’t fully qualify for AIA but still qualifies for FYA, or
• You’re making larger, structured investments in qualifying plant and machinery.

Example scenario where you’d use First-Year Allowance

You buy £10,000 worth of qualifying machinery for your business. However, earlier in the tax year, you’ve already spent heavily on equipment and used up your £1 million Annual Investment Allowance (AIA) limit.

That means you can’t claim full relief through AIA anymore. So instead, HMRC allows you to claim the 40% First-Year Allowance:

• You use 40% upfront relief in year 1 = £4,000.
• Remaining £6,000 is carried into your capital allowances pool.
• That remaining balance is then relieved gradually over future years through writing down allowances.

So in this situation, the 40% FYA becomes useful because AIA has already been fully used. Not because it replaces another tax relief, but because it steps in when AIA is no longer available.

How to claim the 40% First-Year Allowance:

Like Annual Investment Allowance, there’s no individual application for this thankfully. You claim it as part of your normal capital allowances process in your tax return. 

How to claim 40% tax relief through your tax return

1. Check the asset qualifies for the 40% First-Year Allowance under HMRC rules first. This includes main-rate plant and machinery.
2. Keep clear records of the purchase. This needs to include things like invoice, cost, date bought, and when it was first used in the business. 
3. Apply the 40% deduction in your capital allowances calculation for that tax year on the appropriate items. 
4. Put the remaining 60% into your capital allowances pool.
5. Include everything in your Self Assessment tax return under capital allowances. 

Most accountants (like Crunch) can handle the calculation for you, so long as the asset is correctly categorised. The key step is simply making sure the purchase is flagged as eligible for FYA treatment. Everything else flows from that.

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The Writing Down Allowance (or WDA)

If you’re unable to use the AIA (or if you’ve used it all up), and can’t use the 40% First-Year allowance, then this is a great option of getting tax relief on equipment. 

It works a little differently to the ways we’ve already discussed about how to reclaim tax on purchased equipment. Instead of deducting the entire cost in one go, you claim tax relief gradually over a number of years.

The amount you can claim each year depends on which pool the asset falls into:

When would you use WDA?

It usually comes into play when:

• You’ve already used your AIA allowance.
• Part of an asset’s cost remains after claiming the 40% First-Year Allowance.
• The asset doesn’t qualify for Annual Investment Allowance or First-Year Allowance. 
• You’re dealing with certain assets that must be placed into a capital allowances pool.

For many Sole Traders, WDA isn’t something they’ll actively choose. It’s simply the next step in the capital allowances process when full upfront relief isn’t available.

Example scenario

Let’s say you’ve already used up your £1 million AIA limit for the year and then buy another £10,000 of qualifying equipment. As AIA is no longer available, the equipment is added to your main rate pool. 

Under Written Down Allowance, you can claim 18% of £10,000. Which brings the tax relief out as £1,800. This would leave £8,200 remaining in the pool.  The following year, you’d claim 18% of £8,200, and so on until the balance is gradually reduced. 

Here’s an example of how using the Written Down Allowance would look over several years.

Unlike the other mentioned which give tax relief on equipment all at once, WDA spreads the relief over several years.

How to claim it in practice

Like the above ways to reclaim tax on equipment, it’s claimed through your normal tax return. Here are the step-by-step instructions for guiding WDA properly:

1. Keep records of the purchase, including invoices and receipts.
2. Add the asset to the appropriate capital allowances pool.
3. Calculate the annual allowance based on the relevant rate (6% or 18%).
4. Carry forward the remaining balance each year.
5. Include the claim in the capital allowances section of your Self Assessment tax return.

Many accounting software packages will track the remaining balance and calculate future claims automatically, making the process even easier to manage. 

Once an asset enters a capital allowance pool, HMRC’s rules determine how much can be claimed each year until the balance is used up. 
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Which tax relief will most Sole Traders use?

For most Sole Traders, Annual Investment Allowance (AIA) will be the most relevant relief. It allows you to deduct the full cost of qualifying equipment in the same tax year, making it the simplest and most generous option in many cases.

The newer 40% First-Year Allowance can provide valuable additional relief where AIA isn't available, while Writing Down Allowances makes sure you can still claim tax relief over time when upfront deductions aren't possible.

If you're unsure which allowance applies to a purchase, it's worth speaking to an accountant before filing your tax return. Choosing the right allowance can have a significant impact on how much tax relief you receive and when you receive it.

Want to see how affordable accounting can be? You can get a free instant quote with Crunch tailored to what you need. 

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