When a business buys equipment, you usually cannot deduct the full cost as an everyday expense. Capital allowances give you tax relief on that purchase instead.
Eligible purchases may qualify for the £1 million Annual Investment Allowance (AIA), 100% full expensing for companies or the 40% first-year allowance. Other qualifying expenditure may receive writing-down allowances at 14% or 6%. Knowing which allowance applies can reduce your tax liabilities and help your cash flow.
This guide explains how capital allowances work in the UK, what qualifies, and how to claim correctly. The Taxcom can review your purchase classification to ensure you’re claiming the right relief under the correct rules. We can also provide expert tax advisory, guiding on expenditure that qualifies for relief and help you maximise your tax return.
What Are Capital Allowances?
Capital allowances are tax relief that lets a business deduct some or all of a business asset’s value from its profits before tax is calculated. They apply to a capital asset you keep to use in the business, not to stock you intend to sell. Capital allowances can be claimed for purchases dating back several years.
Accounting depreciation is not allowed for tax purposes. It is added back to your profits, and the allowance is deducted in its place. The result is lower taxable profits and a smaller tax bill.
Which Capital Expenditure Qualifies?
Most qualifying capital expenditure is classed as plant and machinery. That covers equipment, business vehicles, some fixtures such as fitted kitchens, and the integral features of a building. Tools, computers, desks and vans are typical qualifying assets. For the full list of eligible items, check HMRC’s guidance or ask your accountant.
What does not qualify
Plant and machinery allowances do not cover land, items used only for business entertainment, or things you lease without owning (apart from hire purchase or long funding leases). Structures and buildings are treated separately, as covered below.
Annual Investment Allowance: The Go-To Relief
For most businesses, the annual investment allowance (AIA) is the simplest option. HMRC sets the AIA at £1 million and excludes business cars, so most equipment is relieved in full in the year of purchase. It covers second-hand assets and is open to companies, sole traders and partnerships whose members are all individuals.
The AIA limit is reduced pro rata for an accounting period shorter than 12 months, and special rules apply to a longer period. Connected companies share one limit. Spending above the limit goes into a pool and attracts a writing down allowance instead.
First Year Allowances, Full Expensing and Corporation Tax
First year allowances let you deduct a larger percentage of the cost immediately. You can claim First Year Allowances alongside Annual Investment Allowances. For corporation tax purposes, certain types are available:
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Full expensing: companies can deduct 100% of the cost of new, unused main rate assets, with no monetary cap. Cars and assets bought for leasing are excluded.
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50% first year allowance: companies can claim this on new special rate assets.
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40% first year allowance: this applies to qualifying main rate expenditure and is open to companies and unincorporated businesses. It excludes cars, second-hand assets and overseas leasing.
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100% first year allowances: these cover qualifying new, unused zero-emission cars and electric vehicle charging equipment. The relief is available for eligible expenditure incurred before April 2027, subject to HMRC’s conditions.
The government’s tax information note confirms the 40% allowance applies to expenditure incurred on or after 1 January 2026. The remaining 60% goes into the main pool.
You cannot claim more than one allowance against the same cost. Where full expensing or the AIA is available, it normally gives the fastest tax relief.
Writing Down Allowance: Main Rate Pool and Special Rate Pool
Where the cost is not fully relieved by the AIA or a first year allowance, you pool the balance and claim a writing down allowance each year on a reducing balance. There are two main pools:
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Main rate pool: most general equipment goes here. The writing down allowance is 14%, down from 18%. The change took effect on 1 April 2026 for corporation tax and 6 April 2026 for income tax. A hybrid rate applies if your accounting period straddles those dates.
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Special rate pool: this takes integral features, long-life assets, solar panels, thermal insulation and higher-emission cars at 6% a year.
Worked Example: Value and Tax Savings
As an example, £10,000 of equipment in the main rate pool gives a first-year writing down allowance of £1,400. The balance of £8,600 is then written down again the following year.
Claim the same £10,000 under the AIA and the whole amount is a deduction in year one. At a 25% tax rate, that is savings of £2,500 now rather than £350. This is why claiming the AIA or a first year allowance first usually benefits your cash flow.
Integral Features and Commercial Property
Integral features are parts of a building that are treated as plant. They include lifts, electrical and lighting systems, hot and cold water systems, and space and water heating. Air-conditioning, heating and ventilation systems also count. They normally sit in the special rate pool, but the AIA can relieve their cost in full if you have allowance available.
If your business buys commercial property containing existing fixtures, you may be able to claim capital allowances where the previous owner has met the pooling requirements. The value of the fixtures is usually agreed with the seller, but a tribunal can determine it if an application is made within two years of purchase.
When you later sell the building, refer to capital gains tax on property for the other side of picture.
Structures and buildings are covered by a separate buildings allowance, available for new non-residential construction from 29 October 2018. It is a flat 3% a year and applies to the building itself rather than the equipment inside it.
Older guidance also refers to enhanced capital allowances for energy-saving equipment on the government’s energy technology list. Check the current position with professionals at The Taxcom before relying on that route.
Capital Allowances for Sole Traders, Partnerships and Property Businesses
Sole traders and partnerships can use the AIA and the 40% allowance, but not full expensing. If you use the cash basis, you can only claim capital allowances on business cars. Cash basis users usually deduct the cost of other equipment as an expense instead.
Property businesses can claim capital allowances on qualifying plant used for commercial lettings, but generally not for ordinary residential lets. The special furnished holiday lettings tax regime ended in April 2025, where residential properties qualified as furnished holiday lettings to claim. However, existing capital allowance pools may still qualify for writing-down allowances.
Smaller landlords may also want to compare the property allowance before deciding how to treat their income and expenses.
How to Claim Capital Allowances: Practical Tips
Allowances are not given automatically. You claim them on your Self Assessment return, partnership return or Company Tax Return, and a company must include a separate capital allowances calculation. Several things are worth remembering:
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Claim in the accounting period or tax year in which the expenditure was incurred, as the AIA and first year allowances cannot be claimed later.
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Keep invoices, installation dates and records of any private use, because you can only claim the business portion.
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Deduct disposal proceeds from the pool when you sell an asset, which can create a balancing charge or allowance.
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Review earlier years, since writing down allowances can still be claimed on assets bought and still used in the business.
Timing matters. Because the main rate has fallen, it is worth modelling when to invest in new equipment and which allowance gives the best result. Our overview of small business tax advice covers wider planning points.
How The Taxcom Can Help
Claiming capital allowances correctly requires careful analysis of your expenditure and understanding current tax rules. We, at The Taxcom, offer:
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Management Accounting: Detailed financial analysis to identify and maximise qualifying capital expenditure.
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Business Growth Advisory: Strategic tax planning to ensure capital purchases are structured for optimal tax relief.
Frequently Asked Questions
1. What Is the Difference Between Capital Allowances and Depreciation?
Depreciation records an asset’s loss of value in business accounts, while capital allowances provide tax relief on qualifying expenditure. HMRC generally does not allow accounting depreciation as a tax deduction.
2. Can I Claim Capital Allowances on Second-Hand Equipment?
Yes, qualifying second-hand machinery and equipment can usually receive the Annual Investment Allowance (AIA). However, full expensing and the 40% first-year allowance generally require new, unused assets.
3. Can I Claim Capital Allowances on a Business Car?
Yes, but business cars do not qualify for AIA or full expensing. Depending on CO2 emissions, they may qualify for writing-down allowances of 14% or 6%, while eligible new zero-emission cars can receive 100% first-year relief.
4. Can I Claim Capital Allowances for Previous Years?
AIA and first-year allowances must generally be claimed for the period in which the expenditure was incurred. However, writing-down allowances can be claimed in later periods on qualifying unrelieved expenditure while you still own the asset.
5. What Happens When I Sell an Asset After Claiming Capital Allowances?
You must account for the disposal proceeds in your capital allowances calculation. Depending on the amount previously claimed and the remaining pool balance, a balancing charge may increase your taxable profits.
Get Tax Specialists and Accountants Involved Early
Choosing between the AIA, full expensing, the 40% allowance and a writing down allowance is not always obvious, particularly with mixed-use assets or property. Tax specialists at The Taxcom can check which assets qualify and help you claim tax relief accurately. You can read more about how to get professional advice from a UK tax advisor in our guide.
If you are planning a significant purchase, ask for expert taxation advice before you commit.