How are capital allowances given effect for employees and office-holders under section 262?

Under section 262 of the Capital Allowances Act 2001, where a person's qualifying activity is an employment or office, any capital allowance is treated as a deduction from their taxable earnings. This reduces the amount of employment income on which they pay tax, mirroring how trading expenses reduce a self-employed trader's taxable profit.

How are balancing charges treated for employees under Capital Allowances Act 2001 section 262?

A balancing charge arising for an employee or office-holder — for example, when an asset is sold for more than its tax written-down value — is treated as additional earnings of the employment or office under section 262. This increases the individual's taxable income for that period, mirroring the treatment of balancing charges as trading receipts for self-employed persons.

Why does section 262 treat allowances as deductions from earnings rather than trading expenses?

Employees and office-holders do not have trading receipts and expenses — they have taxable earnings. Section 262 therefore adapts the capital allowances mechanism so allowances reduce taxable earnings and balancing charges increase them. This ensures employees and office-holders receive the same economic benefit from capital allowances as self-employed traders.

Can you give an example of how section 262 works in practice for an office-holder?

A director required to provide specialist equipment costing £5,000 claims an annual investment allowance. Under section 262, the £5,000 allowance is deducted from taxable earnings, reducing employment income accordingly. If the equipment is later sold for £2,000, a balancing charge of £2,000 is treated as additional earnings, increasing taxable employment income by that amount.

Capital Allowances Act 2001 section 262

Employments and offices

Section 262 explains how capital allowances and balancing charges are given effect when a person's qualifying activity is an employment or office.

Where a person's qualifying activity is an employment or office, capital allowances and charges feed into taxable earnings rather than trading profits
A capital allowance is treated as a deduction from the taxable earnings of the employment or office, reducing the individual's taxable income
A balancing charge is treated as additional earnings of the employment or office, increasing the individual's taxable income
This mechanism ensures employees and office-holders receive the same economic benefit from capital allowances as self-employed traders

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