Capital allowances are tax deductions that UK businesses claim when they buy assets used in their trade, such as equipment, vehicles, or machinery. Instead of deducting the full purchase price from your profits in one go, capital allowances let you spread the tax relief over time, or in some cases claim it all upfront. They apply to sole traders paying income tax and companies paying corporation tax alike.
Which Assets Qualify
Capital allowances cover what HMRC calls “plant and machinery,” a category that is deliberately broad. It includes virtually all fixed assets a business uses, apart from land, buildings, most structures, and intangible assets. Office furniture, computers, tools, manufacturing equipment, commercial vehicles, and software all qualify. So do integral features of a building like electrical systems, heating, and lifts, though these fall into a separate rate category.
A few asset types get special treatment. Cars have their own CO2-based rules (covered below). Thermal insulation, solar panels, and long-life assets (those expected to last 25 years or more) are classified as “special rate” expenditure and attract a lower annual deduction. Items you lease to other people generally don’t qualify, with narrow exceptions for background plant in buildings.
The Annual Investment Allowance
The Annual Investment Allowance (AIA) is the simplest and most generous route for most businesses. It gives you 100% tax relief on qualifying plant and machinery purchases, both new and second-hand, up to a cap of £1 million per year. If your business spends £80,000 on equipment, you can deduct the entire £80,000 from your taxable profits in that accounting period.
The £1 million cap is shared across all qualifying purchases in the year, and businesses in a group share a single allowance between them. For the vast majority of small and medium businesses, the AIA covers every asset purchase they make, so the writing down allowance rates below never come into play.
Writing Down Allowances
When spending exceeds the AIA limit, or for assets that don’t qualify for the AIA (like cars), the remaining value goes into a “pool.” Each year, you deduct a fixed percentage of the pool’s value from your taxable profits. This is the writing down allowance (WDA).
There are two pools with different rates. The main pool covers most general plant and machinery. From April 2026, the main pool rate drops from 18% to 14%. The special rate pool, which covers integral features, long-life assets, thermal insulation, solar panels, and higher-emission cars, allows a 6% annual deduction.
Because writing down allowances are calculated on a reducing balance, the deductions shrink each year. If you put £100,000 into the main pool, you’d deduct £14,000 in the first year (at the new 14% rate), then 14% of the remaining £86,000 the next year (£12,040), and so on. The asset is never fully written off through WDAs alone, though HMRC allows you to write off a pool entirely once its balance falls below £1,000.
Full Expensing for Companies
Full expensing is a 100% first-year allowance available to companies paying corporation tax. It lets you deduct the entire cost of qualifying new plant and machinery in the year you buy it, with no cap. Unlike the AIA, full expensing has no £1 million ceiling, making it particularly valuable for large capital investments.
The catch is that it only applies to new, unused assets. Second-hand equipment doesn’t qualify. Cars are excluded entirely, as are assets bought for leasing. The relief initially ran from 1 April 2023 through 31 March 2026. Sole traders and partnerships cannot claim full expensing since it sits within the corporation tax system only.
Special rate assets (integral features, long-life assets, and similar items) don’t qualify for full expensing but can qualify for a 50% first-year allowance under a parallel scheme introduced at the same time.
How Business Cars Are Treated
Cars follow their own set of rules based on CO2 emissions. For cars bought from April 2021 onward, the thresholds work like this:
- Zero emissions (0g/km), including fully electric cars: 100% first-year allowance on the full cost, but the car must be new and unused.
- Emissions of 50g/km or less: Main rate writing down allowance (14% from April 2026). The car can be new or second-hand.
- Emissions above 50g/km: Special rate writing down allowance (6%). Again, new or second-hand.
If your car doesn’t have an official emissions figure, it goes into the special rate pool automatically, unless it was registered before March 2001, in which case it qualifies for the main rate.
Cars are excluded from both the AIA and full expensing, so outside of electric vehicles there’s no way to claim the full cost in year one. This makes the emission threshold a significant factor in the true after-tax cost of a company vehicle.
What Happens When You Sell an Asset
Selling or disposing of an asset that you’ve claimed capital allowances on has tax consequences. The general rule is straightforward: when you sell an asset that sits in a pool, you deduct the sale price from that pool’s balance. If the pool goes negative (because you sold for more than the remaining pool value), the excess becomes a “balancing charge,” which is added to your taxable profits.
Assets claimed under full expensing have a slightly different disposal rule. Because you already deducted 100% of the cost, the entire sale price becomes a balancing charge. If you bought a machine for £50,000, claimed full expensing, then sold it three years later for £20,000, that £20,000 is added straight to your taxable profits. You don’t route it through a pool.
For assets where you claimed the 50% first-year allowance, only half the sale price forms the balancing charge. The other half is deducted from the special rate pool in the normal way. So if you sold that same asset for £20,000, £10,000 would be a balancing charge and £10,000 would reduce your special rate pool balance.
How to Claim
You claim capital allowances on your tax return. Sole traders and partners include them in the self-assessment return, within the self-employment or partnership pages. Companies include them in their corporation tax return. In both cases, you’ll need records of what you bought, when you bought it, and what you paid. Keep invoices and proof of payment, as HMRC can ask to see them.
You don’t have to claim the full allowance in any given year. If your profits are low and you’d rather carry forward the pool value to get relief in a more profitable year, you can claim a reduced amount or nothing at all. This flexibility can be useful for newer businesses that aren’t yet generating enough profit to benefit from the deduction.