Q: I am a sole trader and have been looking into how to keep my tax bill as low as possible. I’ve heard about an Annual Investment Allowance (AIA) but am unsure if it relates to me. Can you advise please?
A: The AIA allows businesses to deduct the full cost of qualifying purchases (e.g. equipment, machinery, tools) from taxable profits. The current annual limit is £1 million. Eligible items include laptops, office furniture, software, and tools.
It is available for sole traders, limited companies, and partnerships (where all partners are individuals) to claim. So, this can be especially beneficial for small businesses and solopreneurs working from home or cafe’s looking to keep their tax bills low whilst they establish their businesses.
How much you can claim depends on your personal tax rate and how much you spend on qualifying assets. For example, if you’re a higher-rate taxpayer and spent £1,000 on new IT equipment, you could deduct the full £1,000 from your profits, saving you £400 (40% of £1,000).
You must make the claim in the same accounting period that you bought them, through your self-assessment or company tax return. Remember to keep accurate records of these purchases in case HMRC asks for evidence.