Capital Allowances Explained

When you buy equipment, machinery, vehicles or other long-lasting assets for your business, you cannot simply deduct the whole cost as a day-to-day running expense. Instead, you claim tax relief through capital allowances. They let you write off the cost of qualifying assets against your taxable profits, reducing the Income Tax or Corporation Tax you owe. Understanding how the different allowances work helps you time purchases sensibly and claim every pound of relief you are entitled to. This guide sits within our business expenses and deductions hub and complements our guidance on allowable business expenses .

What Capital Allowances Are

Capital allowances apply to capital expenditure rather than revenue expenditure. The difference matters: stock you buy to resell, stationery, fuel and similar consumables are ordinary running costs, deducted in full when calculating profit. Assets you expect to use in the business for more than a year are capital items, and their cost is relieved through capital allowances over time or in one go, depending on the scheme.

Qualifying assets are often described as plant and machinery, a broad term that covers far more than factory equipment. Typical examples include:

• Computers, servers and office equipment
• Tools, machinery and workshop fittings
• Commercial vehicles such as vans and lorries
• Furniture, shelving and integral building features
• Certain costs of altering a building to install qualifying plant

Because accounting depreciation is not allowed for tax, capital allowances are the tax system’s substitute. Whatever depreciation you show in your accounts is added back, and capital allowances are deducted instead. The underlying assets themselves are recorded under fixed assets in the chart of accounts.

The Annual Investment Allowance

The Annual Investment Allowance (AIA) is the most widely used relief. It gives a 100% deduction for qualifying plant and machinery in the year you buy it, up to an annual limit. In other words, if your purchase falls within the AIA limit, you deduct the full cost from your taxable profit straight away rather than spreading it over several years.

The AIA is available to sole traders, partnerships and limited companies alike. Most assets qualify, with the main exception being cars, which are dealt with separately. Where your spending exceeds the annual limit, the excess is not lost; it moves into a pool and attracts writing down allowances instead.

A few practical points to bear in mind:

• The limit applies per business, and connected businesses may have to share a single allowance.
• If your accounting period is shorter or longer than twelve months, the limit is adjusted proportionately.
• The date the expense is incurred, not the date you pay, usually determines the period it falls into.

Full Expensing for Companies

Full expensing is a relief available to companies that pay Corporation Tax. It allows a 100% first-year deduction on qualifying new and unused plant and machinery, with no upper limit on the amount you can claim. For companies investing heavily in equipment beyond the AIA limit, this is a significant benefit.

There are conditions. Full expensing generally applies only to new assets bought by companies (not sole traders or partnerships), and certain items, such as cars and assets bought to lease out, are excluded. Special rate assets qualify for a slightly lower first-year rate rather than the full 100%. When you later sell an asset on which you claimed full expensing, a balancing charge may arise, so it is worth keeping clear records of what was claimed. For broader strategy on relief and timing, see our notes on Corporation Tax planning .

Writing Down Allowances and Pools

Where an asset does not get full relief in year one, its cost is added to a pool and relieved gradually through writing down allowances (WDAs). Each year you deduct a percentage of the pool’s balance, and the remaining balance carries forward to the next year.

There are two main pools:

Pooling keeps the calculation simple: you do not track each asset individually for WDA purposes, but instead apply the relevant percentage to the whole pool balance each year. The unrelieved balance reduces on a reducing-balance basis, so the cash relief is larger in the early years and tapers off.

Cars and Special Rate Items

Cars are treated differently from other vehicles. They do not qualify for the AIA or, in most cases, full expensing. Instead, the rate of writing down allowance depends on the car’s CO2 emissions:

• Low-emission and zero-emission cars attract the most generous treatment.
• Cars with higher emissions go into the special rate pool and attract the lower WDA.

Vans, lorries and other commercial vehicles are not cars for these purposes and usually qualify for the AIA. Special rate items also include integral features of a building, such as electrical and heating systems, and assets with a long expected life. These attract the lower writing down allowance, so the relief is spread over a longer period.

Disposals and Balancing Charges

When you sell, scrap or stop using an asset for the business, you must account for the disposal. You deduct the sale proceeds (or market value) from the relevant pool. If the proceeds are less than the pool balance, the pool simply continues with a lower figure.

A balancing charge arises when the disposal proceeds exceed the unrelieved balance in the pool, which can happen if you previously claimed generous allowances such as full expensing. A balancing charge increases your taxable profit, effectively clawing back relief you no longer need. In some single-asset situations, a balancing allowance can instead give you extra relief on disposal.

Sole Traders Versus Companies

The available reliefs differ depending on your business structure:

Sole traders using the cash basis treat most asset purchases as ordinary expenses rather than claiming separate capital allowances, although cars remain an exception. If you are weighing up your structure, our guide to moving from sole trader to limited company explains the wider considerations.

Claiming on Your Return

You claim capital allowances on your tax return: the Self Assessment return for sole traders and partnerships, or the Company Tax Return (CT600) for companies. Good records are essential, so keep invoices, note the date each asset was brought into use, and record any private-use proportion, which reduces the allowance for unincorporated businesses.

A few habits make claims straightforward:

• Keep a simple fixed asset register listing each purchase, cost and date.
• Separate capital items from revenue expenses in your bookkeeping.
• Review purchases before your year end so timing supports your tax position.

Claims are made within your normal return, and under Making Tax Digital keeping digital records makes the figures easy to pull together. Capital allowances are a valuable but often under-claimed relief, so a tidy bookkeeping process pays for itself.

Related

• Allowable business expenses
• Corporation Tax planning
• Record keeping for expenses
• Tax and VAT guides