At time of writing, in January 2025, the main corporate tax rate in the UK is 25% on profits over £250,000.
So for any business making serious money, a large chunk is going straight to the government.
But you can reduce your tax bill and hold onto as much money as possible by using tax-efficient strategies to fund and grow your business.
Asset finance is an excellent option for tax-efficient growth, as payments on certain items come with valuable tax benefits.
This is especially true for items with specific tax incentives, such as plant and machinery assets and eco-friendly vehicles.
In this blog, we explore the tax benefits of asset finance in simple terms to help your business grow as quickly and profitably as possible.
How does asset finance reduce my tax bill?
The trick to reducing your tax bill with asset finance lies in capital allowance tax breaks.
Capital allowance is a type of tax relief that lets your business deduct a portion of the cost of eligible assets from your taxable profits each year.
When you claim capital allowances, you can reduce your taxable profits by up to 25% of the cost of new qualifying assets.
This reduces your end-of-year corporation tax bill.
Better yet, when you use asset finance that’s spread out quarterly, chances are you’ll be able to claim even greater capital tax allowances!
By using asset finance to acquire new assets, you can qualify for greater tax relief and put yourself in a more advantageous financial position.
With the help of a knowledgeable and experienced asset finance broker like Kane Financial Services, you can make the best use of capital allowance tax breaks to accelerate your business growth.
What assets are eligible for capital allowance tax relief?
Capital allowance is typically used to reduce your tax bill when investing in ‘plant and machinery’ assets.
This category is actually much broader than it first sounds.
In fact, plant and machinery refer to any owned assets used to carry out business.
This includes assets such as equipment, machinery and business vehicles, provided they were:
- Bought outright
- Bought through hire purchase
- Supplied under a long funding lease
However, it excludes assets such as stock in trade and the business premises.
You also can’t claim capital allowances for shorter leases. But the leasing company can. So you should benefit through lower rental charges.
Types of capital allowances for plant and machinery
The value of the asset financing tax benefits you can claim depend on the types of capital allowance you use.
If an asset qualifies for more than one capital allowance, you can choose which one to apply.
The Annual Investment Allowance
The Annual Investment Allowance (AIA) is the most valuable tax benefit a business can claim.
It deduces the full cost of qualifying plant and machinery assets from your taxable profits.
Most plant and machinery assets qualify for AIA. But buildings, land, leased assets, cars and preowned equipment are excluded.
The annual maximum allowance for AIA is £1m per business.
So if you run a large business with significant investment plans, you need to manage your asset investments strategically to maximise your AIA tax savings.
The asset finance experts at Kane Financial Services can help you coordinate asset acquisitions to create the greatest possible savings for your business.
Writing down allowances
If you’ve acquired assets that don’t qualify for AIA, or you’ve already claimed the maximum amount, you can instead reduce your tax bill through writing down allowances (WDAs).
The amount you can deduct depends on the asset.
One of the greatest advantages of WDAs is that you can spread the tax relief over several years.
That means you can realise the asset’s tax benefit over its useful lifespan.
Full expensing
Full Expensing allows companies to claim the full purchase cost of qualifying plant and machinery assets against their taxable income in the year it was first purchased.
So for every pound your company spends on a qualifying asset, your taxes are reduced by up to 25p.
This only applies to plant and machinery purchases made between 1st April 2023 and 31st March 2026.
Note that Full Expensing is only available to businesses that pay corporation tax.
Enhanced Capital Allowance
New vehicles with zero CO2 emissions are also eligible for a 100% first-year allowance from 1st April 2021.
This Enhanced Capital Allowance (ECA) is designed to incentivise eco-friendly vehicle investments.
Vehicles with higher CO2 emissions are taxed under the Special Rate (SR) pool allowance, which is subject to a lower rate of capital allowances.
Special Rate pool allowance
The SR pool allowance was introduced to cover asset purchases that don’t come under plant and machinery rules.
It allows you to claim tax relief on 50% of a qualifying asset’s value in the year it was purchased.
SR pool allowance assets include:
- Parts of a building considered integral, called ‘integral features’
- Items with a long life
- Solar panels
- Thermal insulation you’ve added to a building
- Cars with CO2 emissions over 50g/km
As with Full Expensing, SR tax benefits are only available to businesses that pay corporation tax, and only apply to new assets.
Apply for tax-efficient asset finance deals
As independent asset finance brokers with over 35 years’ experience, Kane Financial Services is well positioned to match you with industry-leading asset finance rates and terms.
On top of that, we can offer specialist advice for getting the greatest possible tax benefits for the assets you finance.
That means you can grow your business quickly with top-of-the-line assets while also maximising your annual profitability.
Apply for asset finance online now or contact us to find out more about how asset financing can make your business more tax efficient