Capital allowances explained UK | Figures Chartered Accountants

Capital allowances are the main way UK businesses get tax relief on money spent on equipment, vehicles, and other assets. Unlike day-to-day expenses, which reduce your taxable profit in the year you incur them, capital expenditure is dealt with through a separate system of allowances. Understanding capital allowances can save your business significant tax. This guide explains how they work, what qualifies, and how to claim them.

We cover the annual investment allowance (AIA), writing down allowances (WDA), full expensing, and the practical steps to get the relief you are entitled to. This is for UK limited companies, sole traders, and partnerships that buy assets for their business.

What are capital allowances?

When your business buys a capital asset, such as a computer, a van, or machinery, you cannot deduct the full cost as an expense in your accounts (unlike revenue spending such as rent or utility bills). Instead, you claim capital allowances, which spread the tax relief over time or, in many cases, give you the full deduction in the year of purchase.

Capital allowances reduce your taxable profit, which in turn reduces the amount of corporation tax (for companies) or income tax (for sole traders and partners) you owe. They apply to assets used in your trade, not for personal use.

Revenue vs capital

Revenue expenses (rent, salaries, stationery, insurance) are deducted from profit in the period. Capital expenses (equipment, vehicles, property improvements) go through capital allowances. The distinction matters because the timing and amount of relief differ. Your accountant will separate the two and apply the correct treatment. For more on year-end accounts, see our Statutory Accounts & Tax service.

The annual investment allowance (AIA)

The AIA is the most straightforward capital allowance. It lets you deduct the full cost of qualifying assets in the year you buy them, up to a limit. The current AIA limit is £1,000,000 per year, which has been made permanent.

What qualifies for AIA:

Plant and machinery (computers, printers, phones)
Office furniture and equipment
Commercial vehicles (vans, lorries)
Tools and specialist equipment
Some fixtures in commercial property

What does not qualify for AIA:

Cars (they have their own rules)
Assets bought in the last few days of an accounting period to be used later (anti-avoidance rules)
Items given to you or bought for non-business purposes

For the vast majority of small businesses, the £1,000,000 AIA is more than enough to cover all asset purchases in a year. You get 100% tax relief in the year of purchase. See HMRC's guidance on capital allowances for full details.

Example

A consulting firm buys laptops for £4,000, office furniture for £3,000, and a server for £5,000 in the year. Total qualifying spend is £12,000, well within the AIA. The full £12,000 is deducted from taxable profit in that year.

Full expensing

From 1 April 2023, companies (not sole traders or partnerships) can claim 100% first-year allowances on qualifying plant and machinery through full expensing. This applies to new (not second-hand) assets that are not cars.

Main rate assets (most plant and machinery): 100% deduction in the year of purchase.
Special rate assets (e.g. long-life assets, integral features of buildings): 50% first-year allowance, with the balance written down at 6% per year.

Full expensing has no monetary cap, unlike the AIA. For larger companies making significant capital investments, full expensing can be more beneficial. For most small businesses, the AIA will cover everything, so full expensing is mainly relevant if you spend over £1,000,000 on qualifying assets.

Writing down allowances (WDA)

If you do not use the AIA or full expensing for an asset (or the cost exceeds the AIA limit), the remainder goes into a capital allowances pool and is written down over time:

Main pool (most plant and machinery): 18% per year on a reducing balance basis.
Special rate pool (long-life assets, integral features, thermal insulation): 6% per year on a reducing balance basis.

Example: You buy a car for business use costing £20,000. Cars do not qualify for AIA. If the car has CO2 emissions above 50 g/km, it goes in the main pool at 18% WDA. In year one, you claim £3,600 (18% of £20,000). In year two, you claim 18% of the remaining £16,400, and so on.

Cars

Cars have specific rules:

Electric or zero-emission cars (0 g/km CO2): 100% first-year allowance (full deduction in year one).
Cars with CO2 emissions of 50 g/km or less: Main pool, 18% WDA.
Cars with CO2 emissions above 50 g/km: Special rate pool, 6% WDA.

If the car is also used privately, the allowance is restricted to the business-use proportion. Your accountant can calculate this.

Structures and buildings allowance (SBA)

If you build, buy, or renovate a commercial building, you may be able to claim the structures and buildings allowance. This gives relief at 3% per year on a straight-line basis over approximately 33 years. It applies to the structural costs but not to land or integral features (which are covered by capital allowances in the special rate pool).

SBA is relevant if your business owns commercial property. The rules are detailed and your accountant will need to review the costs. For property businesses or those planning a fit-out, our Fractional CFO service can model the tax impact.

How to claim capital allowances

Capital allowances are claimed on your tax return:

Limited companies: Through the corporation tax return (CT600). Your accountant completes the capital allowances computation as part of the tax return.
Sole traders and partnerships: Through the self-assessment tax return.

You must keep records of asset purchases, including invoices, dates, and details of business use. If an asset is used partly for private purposes, only the business portion qualifies.

Timing

The date you incur the expenditure matters. For most assets, the expenditure is incurred when the obligation to pay becomes unconditional (usually when the asset is delivered or the contract is signed). If you are close to your year end, timing a purchase before or after the year end can affect which period gets the relief. Your accountant can advise.

Common mistakes

Not claiming at all. Some businesses forget to claim capital allowances or assume they are automatic. They must be actively claimed.
Confusing revenue and capital. Treating a capital item as a revenue expense (or vice versa) leads to incorrect tax. Your accountant will make the distinction.
Missing AIA on small items. Even small asset purchases (tools, equipment, phones) qualify for AIA.
Not keeping records. HMRC can ask for evidence. Keep invoices and a schedule of assets.
Ignoring disposals. If you sell or dispose of an asset you claimed allowances on, there may be a balancing charge (you give back some relief) or a balancing allowance (you claim extra). These must be reported.

UK tax and legal accuracy

The capital allowance rates and AIA limit described here apply to the 2024/25 and 2025/26 tax years. The permanent AIA of £1,000,000 was confirmed in the Autumn Statement 2022. Full expensing for companies applies from 1 April 2023 and has been made permanent. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action.

Frequently asked questions

Can sole traders claim capital allowances?

Yes. Sole traders and partnerships claim capital allowances through their self-assessment tax return. The AIA and WDA rules apply in the same way as for companies, although full expensing is only available to companies.

Do I have to use the AIA?

No. You can choose to claim less than the full AIA in a year, carrying the unclaimed balance forward in the pool. However, it usually makes sense to claim the maximum available.

What is the difference between AIA and full expensing?

AIA gives 100% relief up to £1,000,000 and is available to all businesses. Full expensing gives 100% relief with no cap but is only available to companies and only for new (not second-hand) plant and machinery.

Can I claim capital allowances on a leased asset?

It depends on the lease type. For hire purchase, the business typically claims capital allowances. For operating leases, the rental payments are usually deducted as a revenue expense instead. Your accountant will check the contract terms.

What happens if I sell an asset I claimed allowances on?

If you sell the asset for more than the written-down value in the pool, you may face a balancing charge (extra tax). If you sell for less, you get a balancing allowance (extra relief). Disposals should be reported in the year of sale.

Summary and next steps

Capital allowances let UK businesses claim tax relief on equipment, vehicles, and other assets. The £1,000,000 AIA covers most small business purchases in full. Make sure you claim every year, keep records, and consider timing around your year end.

If you need help with capital allowances or year-end tax planning, we are here to help. At Figures Chartered Accountants we prepare Statutory Accounts & Tax and make sure you claim every relief you are entitled to. Book a discovery call to get started.