What does `100% allowable against tax mean?

[neilski]

What does `100% allowable against tax mean?

I need to know in the most simplest form what this means please.
For example if am a sole trader and i lease a van worth £10,000 and the repayments are `100% allowable against tax`...what do i get back or not have to pay in tax for the first year of having the van.does this mean that if my first years payments total £4000 i pay £4000 less tax when i do my accounts? i really cant grasp this and i need to know as i need to work out my costs to start up and work for myself (or whether it is viable at all) .

thankyou for any help!

[buildersmate]

"does this mean that if my first years payments total £4000 i pay £4000 less tax when i do my accounts?"

No - it means that you deduct £4000 from the net profit you made in the first year, and that reduced figure is that used to assess the amount of tax payable. Since the basic rate of tax is 20%, this will normally mean your assessed tax bill is reduced by some £800 (20% of £4k).
The net profit is the total income from the business less the total expenses incurred in running it.

[d9f1c7]

as above it means that the payements are an allowable expense against tax so they are effectively treated the same as any other business expense.

[1eyedjack]

As above, but with some minor additional comments.
Depending on your profitability, the net cash benefit to you in terms of direct tax savings could be as much as 28% for a basic rate tax payer because the deduction would also come off your profits chargeable to class 4 National Insurance contributions at 8%.
If you are claiming working tax credits and the award is not fully abated by reason of your total income exceeding the relevant levels (including £10K disregard over previous year, then the expense may increase your tax credit award. Taking into account the direct tax effect and maximum possible tax credit benefit it is possible, if the facts fit for the van almost to pay for itself at the expense of the rest of the taxpaying population.

If you use the van at all for private use then you would have to make an adjustment for that, which would reduce the claim to a bit below 100%.

There is a consultation document due as a result of last week's budget that allows for calculating your tax on a cash-in-and-out basis. Until that happens there is technically quite a complicated regime for calculating how much of the lease cost you can claim in a particular year, and this may differ from the actual amount paid in that year. However over the full life of the lease it should not make any difference (and may not make much of a difference in any particular year, given the sums being talked about here).