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Tax

What is Capital Allowances?

Capital allowances let you deduct the cost of business assets (equipment, vehicles, machinery) from your profits before calculating tax.

Current Rate (2025/26)

Annual Investment Allowance: 100% on first £1m of qualifying assets

Example

Buy a £5,000 laptop for business. Claim 100% AIA = reduce taxable profit by £5,000 = save £1,250 Corporation Tax (at 25%).

Key Dates

Claim in the accounting period you bought the asset

How Capital Allowances Works in Practice

Capital allowances are the tax relief mechanism for the cost of capital assets used in your business. When you buy equipment, vehicles, machinery, or other qualifying assets, you cannot simply deduct the cost as a business expense in your profit and loss account for tax purposes. Instead, you claim capital allowances, which spread the tax relief over time or, in many cases, allow you to claim the full cost immediately.

The Annual Investment Allowance (AIA) is the most commonly used capital allowance for small businesses. It gives 100% first-year relief on qualifying expenditure up to £1,000,000 per year. For most small companies, this means you can deduct the full cost of equipment, machinery, and fixtures in the year of purchase. The £1m limit has been made permanent, removing the uncertainty of previous temporary increases.

Full expensing, introduced in April 2023 and made permanent, allows companies to claim 100% first-year relief on qualifying new (not second-hand) plant and machinery without the £1m cap. This is mainly relevant for larger companies whose spending exceeds the AIA limit, but it also provides an alternative route for qualifying expenditure.

Assets that do not qualify for AIA or full expensing go into writing down allowance (WDA) pools. The main rate pool gives 18% WDA per year, and the special rate pool gives 6% per year. Cars, for example, go into different pools depending on their CO2 emissions: zero-emission cars qualify for 100% first-year allowance, cars with emissions up to 50g/km go into the main rate pool, and higher-emission cars go into the special rate pool.

Step by Step

When you buy a qualifying asset, you add it to your capital allowance computation for that accounting period. If it qualifies for AIA, you deduct 100% of the cost from your taxable profit. If not, it goes into the appropriate writing down allowance pool, and you deduct the applicable percentage each year.

The computation is typically prepared as part of your Corporation Tax return. Your accountant adjusts the accounting profit by adding back depreciation (which is not tax-deductible) and deducting capital allowances instead. The difference between depreciation and capital allowances can be significant, especially in years when you make large capital purchases.

Timing matters. An asset must be purchased and brought into use during the accounting period to qualify for allowances in that period. If your year end is 31 March and you buy equipment on 2 April, the allowance falls into the next accounting period. Planning purchases around your year end can accelerate tax relief by up to 12 months.

Practical Tips

  • Review planned capital purchases before your year end and consider whether bringing purchases forward by a few weeks could accelerate the tax relief
  • Always claim AIA on qualifying expenditure rather than defaulting to writing down allowances, as AIA gives 100% relief immediately
  • Keep clear records of the business use percentage for any assets with personal use, especially vehicles, as HMRC will restrict allowances on mixed-use assets
  • Consider the timing of vehicle purchases carefully, as the CO2 emission thresholds determine which pool the car enters and therefore the rate of tax relief

Common Mistakes to Avoid

  • Confusing depreciation with capital allowances. Depreciation is an accounting concept; capital allowances are the tax relief. They are calculated differently and the amounts rarely match
  • Not claiming AIA on qualifying assets and instead letting them default into writing down allowance pools, which defers the tax relief unnecessarily
  • Assuming cars qualify for AIA when they do not. Cars are specifically excluded from AIA and must be claimed through the appropriate WDA pool based on CO2 emissions
  • Missing the timing window by purchasing assets just after the year end, which delays the tax relief by a full accounting period

Frequently Asked Questions

What qualifies for the Annual Investment Allowance?

Most plant and machinery qualifies for AIA, including computers, office furniture, tools, commercial vehicles, and some fixtures in business premises. Cars do not qualify for AIA. Expenditure on buildings generally does not qualify unless it is integral features or fixtures.

Can I claim capital allowances on a car?

Yes, but not through AIA. Zero-emission cars qualify for 100% first-year allowance. Cars with CO2 emissions up to 50g/km go into the 18% main rate pool. Higher-emission cars go into the 6% special rate pool. If the car has any personal use, the allowances must be restricted accordingly.

What is the difference between capital allowances and depreciation?

Depreciation is an accounting charge that spreads the cost of an asset over its useful life in your accounts. Capital allowances are the tax relief calculated under HMRC rules. They often differ in timing and amount. For tax purposes, depreciation is added back and capital allowances are deducted instead.

Can I claim capital allowances on second-hand assets?

Yes. Second-hand assets qualify for AIA and writing down allowances just like new assets. The main exception is full expensing, which only applies to new assets. For most small businesses claiming AIA, there is no distinction between new and second-hand equipment.

What happens when I sell an asset I claimed capital allowances on?

When you sell an asset, the proceeds are deducted from the capital allowance pool. If the proceeds exceed the pool value, a balancing charge arises and you pay tax on the excess. If the pool value exceeds the proceeds, you get a balancing allowance. This ensures the overall relief matches the net cost of the asset.

Source: HMRC CA10000 - Capital Allowances Manual: Introduction

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