Capital Allowances 2025/26: How to Claim Tax Relief on Business Assets

When your limited company buys equipment, vehicles, or machinery, you don't have to wait years to get tax relief. Capital allowances let you deduct the cost of business assets from your profits, reducing your Corporation Tax bill immediately.

The headline figures: Annual Investment Allowance gives you 100% relief on up to £1 million of qualifying expenditure per year. Full expensing (permanent since April 2023) gives you 100% relief on new plant and machinery with no upper limit. For most small companies, this means you can write off the entire cost of business equipment in the year you buy it.

This guide explains how capital allowances work, what qualifies, and how to maximise your tax relief.

Capital Allowances at a Glance

What Are Capital Allowances?

Capital allowances are the tax system's way of giving you relief on business assets. When you buy something that lasts for years (a laptop, van, or piece of machinery), you can't simply deduct the full cost as an expense like you would with rent or utilities.

Instead, capital allowances let you deduct the cost over time - or in many cases, all at once.

Why They Exist

Without capital allowances, businesses would face a cash flow penalty whenever they invested in equipment. You'd pay the full cost upfront but only get gradual tax relief through accounting depreciation, which HMRC doesn't accept as a deduction.

Capital allowances bridge this gap. They're HMRC's official mechanism for giving tax relief on capital expenditure.

The Basic Principle

Depreciation in your accounts ≠ tax relief. HMRC ignores your depreciation charge entirely. Instead, you claim capital allowances based on specific rules. This means your taxable profit differs from your accounting profit by the amount of depreciation added back, minus capital allowances claimed.

Annual Investment Allowance (AIA): The Main Relief

The Annual Investment Allowance is the primary capital allowance for most UK businesses. It gives you 100% first-year relief on qualifying expenditure up to £1 million per year.

What the £1 Million Limit Means

You can claim full tax relief on the first £1 million of qualifying expenditure in each accounting period. For most small and medium companies, this effectively means unlimited 100% relief - few spend more than £1 million on equipment annually.

If your accounting period is shorter or longer than 12 months, the £1 million limit is adjusted proportionally.

What Qualifies for AIA

Plant and machinery is the key phrase. This includes:

• Computer equipment - Laptops, desktops, servers, monitors, printers
• Office furniture - Desks, chairs, storage, meeting room equipment
• Tools and equipment - Anything used in your trade or profession
• Commercial vehicles - Vans, lorries, trucks (but not cars - see below)
• Manufacturing machinery - Production equipment, factory machinery
• Security systems - CCTV, alarms, access control
• Kitchen equipment - Commercial ovens, refrigeration (for hospitality businesses)
• Fixtures and fittings - Shelving, counters, display units

What Doesn't Qualify for AIA

• Cars - They have separate, less generous rules (covered below)
• Buildings - Generally no relief, with limited exceptions
• Land - Never qualifies
• Items for leasing - Assets bought to lease to others don't qualify

Timing Is Everything

To claim AIA, the asset must be:

1. Purchased within your accounting period
2. Available for use in your business before your year-end

Ordering equipment that arrives after your year-end doesn't qualify for that year. Plan purchases carefully around your accounting period.

Example: Your year-end is 31 March. You order a £15,000 CNC machine on 25 March, but it's delivered and installed on 5 April. You claim AIA in the following year, not this one.

Full Expensing: The Permanent 100% Allowance

Since April 2023, full expensing has been a permanent feature of the UK tax system. It provides 100% first-year relief on qualifying new plant and machinery with no upper limit.

How Full Expensing Works

• 100% for main rate assets - Most plant and machinery
• 50% for special rate assets - Integral features and long-life assets
• Must be new - Second-hand assets don't qualify
• Companies only - Sole traders and partnerships can't use full expensing

Full Expensing vs AIA: Which to Use?

For most small companies, it doesn't matter - both give 100% relief. However:

• AIA applies to new AND second-hand assets
• Full expensing only applies to new assets
• AIA has a £1 million cap; full expensing is unlimited
• Full expensing has clawback rules if you sell the asset

Practical advice: Use AIA first for its flexibility. Full expensing becomes relevant if you're spending over £1 million or want to preserve AIA for second-hand purchases.

The Clawback Rule

If you sell an asset that benefited from full expensing, you may face a "balancing charge" - effectively repaying some of the tax relief. This is calculated based on the sale proceeds and original cost.

Writing Down Allowances: When 100% Isn't Available

Writing Down Allowances (WDAs) give you gradual tax relief when 100% first-year relief isn't available. This applies when:

• You've exceeded your AIA limit
• You're claiming on second-hand assets that don't qualify for full expensing
• You have assets in existing pools from previous years

Main Pool (18% per year)

Most plant and machinery goes into the main pool, which attracts an 18% annual writing down allowance on the reducing balance.

Example: You have £50,000 in your main pool. You claim 18% = £9,000 as a deduction. Next year, the pool balance is £41,000, and you claim 18% of that (£7,380), and so on.

Special Rate Pool (6% per year)

Certain assets attract only a 6% writing down allowance:

• Integral features - Electrical systems, cold water systems, lifts, escalators, external solar shading
• Long-life assets - Items with an expected life of 25+ years
• Thermal insulation for buildings
• High-emission cars (over 50g/km CO2)

When You'd Use WDAs

1. Exceeding AIA - If you spend £1.2 million on equipment, the first £1 million gets 100% AIA relief. The remaining £200,000 goes into pools and attracts WDAs.

2. Second-hand assets - Buying used equipment doesn't qualify for full expensing. If you've used your AIA, you'll claim WDAs.

3. Existing pools - If you have assets from previous years in pools, you continue claiming the annual WDA.

Cars: Special Rules Apply

Cars have their own capital allowance rules based on CO2 emissions. These rules are less generous than for other assets because cars have significant private use potential.

CO2-Based Allowances for Cars

Why Electric Vehicles Win

A fully electric company car qualifies for 100% First Year Allowance. Buy a £40,000 electric car and deduct the full amount from your profits immediately, saving up to £10,000 in Corporation Tax (at 25%).

Compare this to a petrol car with 120g/km emissions: you'd only claim 6% per year (£2,400 in year one), taking over 30 years to claim the full cost.

Cars Don't Qualify for AIA

This catches out many business owners. Even a commercial vehicle used 100% for business doesn't qualify for AIA if it's classified as a car (designed primarily for passenger transport).

What is a car? Generally, any vehicle designed to carry passengers. Vans, pickup trucks (with payload over 1 tonne), and lorries are not cars and qualify for AIA.

Company Car Tax Implications

Remember that capital allowances reduce Corporation Tax, but if the car is available for private use, there's a separate Benefit in Kind charge. Electric cars have low BIK rates (2% for 2024/25), making them doubly tax-efficient.

What Doesn't Qualify for Capital Allowances

Some business purchases never qualify for capital allowances, no matter how essential:

Buildings and Structures

You generally can't claim capital allowances on buildings themselves. However, there are exceptions:

• Structures and Buildings Allowance (SBA) - 3% per year on construction costs of non-residential structures built after October 2018
• Integral features - Electrical systems, plumbing, heating within buildings qualify for special rate allowances
• Energy-saving equipment - Certain qualifying equipment gets 100% relief

Land

Land never qualifies for capital allowances. The rationale: land doesn't depreciate (in fact, it typically appreciates).

Intangible Assets

Software, patents, and goodwill don't qualify for capital allowances. Instead, they're covered by separate intangible assets rules that allow amortisation over their useful life.

Items Not Used for Business

If an asset has significant personal use, you can only claim capital allowances on the business proportion. A laptop used 50% for business qualifies for 50% of the normal allowance.

Timing Your Purchases: Year-End Planning

Strategic timing of asset purchases can significantly impact your tax position.

Accelerate Before Year-End

If you're planning equipment purchases in the next few months, buying before your year-end brings forward the tax relief by 12 months.

Example: Year-end 31 December. You plan to buy £20,000 of equipment in February. Bringing that forward to December saves you tax 12 months earlier - that's £5,000 (at 25% CT rate) you don't have to pay in July instead of the following July.

Consider Your Profit Position

If this year's profits are higher than expected (putting you in a higher marginal CT rate), accelerating purchases makes sense. If next year will be more profitable, you might defer.

The marginal Corporation Tax rates matter:

• Profits under £50,000: 19% rate
• Profits £50,000-£250,000: Marginal relief (19-25% effective)
• Profits over £250,000: 25% rate

The "Available for Use" Test

HMRC requires the asset to be available for use, not just ordered or paid for. Ensure delivery and installation happen before your year-end if you want to claim that year.

Small Pools Write-Off

If your main pool or special rate pool balance falls below £1,000, you can write off the entire remaining balance in one go. This is a small but useful simplification.

How It Works

Instead of claiming 18% (or 6%) on a tiny pool balance indefinitely, you claim 100% of anything under £1,000. This clears the pool and simplifies your tax computation.

Example: Your main pool balance is £800 after claiming WDAs. Instead of claiming £144 (18% x £800), you write off the full £800 and close the pool.

Practical Application

This matters more for ongoing businesses with old asset pools. If you've been claiming WDAs for years and the pool has dwindled, check if it's below the £1,000 threshold and claim the final write-off.

How to Claim Capital Allowances

Capital allowances are claimed on your Company Tax Return (CT600). Here's what you need:

Record Keeping

Maintain records of:

• Purchase invoices showing date, amount, and description
• Asset register listing all capital items owned
• Delivery/installation evidence proving the "available for use" date
• Private use estimates if any assets have personal use element

The CT600 Computation

Your accountant (or accounting software) calculates capital allowances as part of the tax computation. The process:

1. Add back accounting depreciation to profit
2. Calculate capital allowances (AIA, full expensing, WDAs)
3. Deduct capital allowances to arrive at taxable profit

Short Accounting Periods

If your accounting period is shorter or longer than 12 months:

• AIA limit is proportionally adjusted
• WDA rates are proportionally adjusted
• Full expensing remains 100% (no adjustment)

Practical Examples

Example 1: Small Company Equipment Purchase

Scenario: A software consultancy with £80,000 profit buys:

• Laptops and monitors: £8,000
• Office furniture: £3,000
• Electric company car: £45,000

Capital allowances claim:

• Laptops and monitors: £8,000 (100% AIA)
• Office furniture: £3,000 (100% AIA)
• Electric car: £45,000 (100% First Year Allowance - cars don't use AIA)
• Total claim: £56,000

Tax saving: £56,000 x 23% (marginal rate) = £12,880

Example 2: Manufacturing Investment

Scenario: A manufacturing company invests £1.5 million in new machinery.

Capital allowances claim:

• First £1,000,000: 100% AIA
• Remaining £500,000: 100% full expensing (new equipment)
• Total first-year claim: £1,500,000

Tax saving: £1,500,000 x 25% = £375,000

Example 3: Second-Hand Equipment

Scenario: A restaurant buys second-hand kitchen equipment for £25,000.

Capital allowances claim:

• Full £25,000 qualifies for AIA (second-hand is fine for AIA)
• Total claim: £25,000

If they'd already used their AIA, the equipment would go into the main pool at 18% WDA, yielding £4,500 relief in year one.

Common Mistakes to Avoid

1. Missing the "Available for Use" Date

Ordering equipment before year-end but receiving it after means you claim next year, not this year. Plan delivery timing carefully.

2. Forgetting About Cars

Many directors assume all vehicles qualify for AIA. Cars don't. Check the CO2 emissions and claim the appropriate allowance.

3. Not Claiming on Fixtures in Leased Premises

If you fit out leased premises (installing kitchens, electrical systems, air conditioning), you may be able to claim capital allowances even though you don't own the building.

4. Ignoring Small Items

Items like tools, computer peripherals, and small equipment add up. Track everything over £100 - it all qualifies.

5. Depreciation Confusion

Your accounts show depreciation, but this doesn't equal tax relief. Always calculate capital allowances separately.

Frequently Asked Questions

Can I claim capital allowances on second-hand equipment?

Yes, second-hand equipment qualifies for the Annual Investment Allowance (100% first-year relief up to £1 million). However, it doesn't qualify for full expensing, which requires new assets. For most small businesses, AIA covers second-hand purchases perfectly well.

What's the difference between AIA and full expensing?

Both give 100% first-year relief. AIA has a £1 million annual cap but covers new and second-hand assets. Full expensing has no cap but only applies to new assets and has clawback rules on disposal. Most small companies use AIA because it's simpler and more flexible.

Do I have to claim capital allowances in the year I buy the asset?

For AIA and full expensing, yes - you claim in the year the asset is available for use. You can't defer the claim to a later year. However, if you miss claiming, you may be able to amend your tax return within the normal time limits.

Can sole traders and partnerships claim these allowances?

Sole traders and partnerships can claim AIA and writing down allowances, but not full expensing (which is companies only). The AIA limit is shared between all businesses under common control for sole traders with multiple ventures.

How do capital allowances work if I use an asset partly for personal purposes?

You can only claim capital allowances on the business proportion. If a laptop is used 70% for business and 30% personally, you claim 70% of the normal allowance. Keep records to justify your business use percentage.

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

You may face a "balancing charge" that adds back some of the relief to your taxable profits. The calculation depends on the sale proceeds, original cost, and how the allowances were claimed. This prevents you getting relief on the full cost and then recovering most of it through sale.

Are there any allowances for buildings?

Generally no, but some exceptions exist. The Structures and Buildings Allowance gives 3% annual relief on construction costs of non-residential buildings built after October 2018. Integral features within buildings (electrical systems, lifts, heating) qualify for the 6% special rate pool.

Should I buy equipment before or after my year-end?

Usually before - this brings forward your tax relief by 12 months. However, if you expect significantly higher profits next year (and therefore a higher tax rate), deferring might make sense. Also consider cash flow - don't strain finances just to accelerate tax relief.

How AccountsOS Helps Track Capital Allowances

Managing capital allowances manually is tedious. AccountsOS simplifies the process:

Automatic Asset Categorisation

When you record an equipment purchase, AccountsOS automatically identifies it as a capital item and categorises it correctly (main pool, special rate, cars, etc.).

Real-Time Tax Impact

See immediately how each purchase affects your Corporation Tax liability. Buy a £10,000 laptop and watch your estimated tax bill drop by £2,500.

Year-End Reminders

AccountsOS alerts you before your year-end: "You have £950,000 of unused AIA. Consider accelerating planned equipment purchases."

Plain English Questions

Ask: "How much capital allowances can I claim this year?" or "Should I buy the new van before year-end?" and get answers based on your actual company data.

Key Takeaways

1. AIA covers most needs - £1 million at 100% relief handles the vast majority of small company equipment purchases

2. Full expensing is unlimited - For new assets over £1 million, full expensing provides 100% relief with no cap

3. Cars have special rules - Electric vehicles get 100% relief; petrol/diesel cars get much less

4. Timing matters - Assets must be available for use before year-end to claim that year

5. Second-hand qualifies for AIA - You don't have to buy new to get 100% first-year relief

6. Don't forget small items - Every qualifying purchase adds up to meaningful tax savings

For more on reducing your Corporation Tax bill, see our guides on tax deductions for limited companies and year-end tax planning. Use our corporation tax calculator to see your current liability and learn how AccountsOS works to keep everything tracked automatically.

Tax rules change frequently. This article reflects UK tax law as of January 2025. Always verify current rates with HMRC or consult a qualified accountant for advice specific to your situation.