Capital Allowances Explained

When your business invests in new equipment, vehicles, or property improvements, the cost doesn’t usually qualify as a standard tax-deductible expense. However, capital allowances can provide valuable tax relief on this kind of spending — helping you recover some of the cost through your tax return.

At Your Accounting Club, we help limited companies and sole traders understand and maximise these allowances, ensuring that every eligible purchase works as hard for your tax position as it does for your business.

What Are Capital Allowances?

Capital allowances are a form of tax relief that lets you deduct a portion of the cost of qualifying capital expenditure — such as machinery, equipment, furniture, or vehicles — from your taxable profits.

The type and rate of allowance available depend on the asset you’ve purchased and how it’s used in your business.

If you’ve financed the asset through hire purchase or a loan, you can usually still claim allowances as though you’d bought it outright. Interest or finance charges are instead treated as standard tax-deductible expenses.

However, if you rent or lease equipment (known as an operating lease), the rental payments are treated as regular business expenses — no capital allowances apply.

The Annual Investment Allowance (AIA)

For most businesses, the Annual Investment Allowance (AIA) is the quickest way to claim 100% tax relief on qualifying plant and machinery (excluding cars) in the year of purchase.

The current AIA limit is £1 million, meaning you can deduct the full cost of qualifying assets up to that amount from your taxable profits.

If you spend above this limit, the remaining expenditure goes into a “pool” and receives Writing Down Allowances (WDA) each year — at 18% for most assets, or 6% for those in the “special rate pool” (such as integral building features).

Timing can make a big difference, so it’s wise to plan purchases carefully within your accounting period to make the most of your AIA entitlement.

Full Expensing for Companies

Since 1 April 2023, companies (but not sole traders or partnerships) can also benefit from Full Expensing — a 100% first-year allowance on new and unused plant and machinery that qualifies for the 18% main rate WDA.

There’s also a 50% first-year allowance for special rate assets, such as certain fixtures and fittings.

Cars and most leased assets don’t qualify, but for incorporated businesses investing heavily in new equipment, Full Expensing can offer a significant upfront tax advantage.

Pooling and Disposal Rules

Most plant and machinery costs are grouped into “pools” — either the main pool (18%) or the special rate pool (6%). Allowances are then applied annually to these totals rather than individual assets.

When an asset is later sold, the proceeds are deducted from the pool. If the proceeds exceed the balance, the excess is treated as taxable income (known as a balancing charge).

This system helps smooth tax relief across years while ensuring accuracy when assets are sold or scrapped.

Structures and Buildings Allowance (SBA)

If you’ve spent money constructing, renovating, or converting business premises, you may qualify for the Structures and Buildings Allowance (SBA).

This provides a 3% annual deduction on a straight-line basis for the cost of commercial buildings and improvements — excluding land and residential dwellings.

It can apply to offices, factories, warehouses, and other commercial structures, but not to home offices or domestic areas within mixed-use properties.

Cars and Capital Allowances

Cars are treated differently. They don’t qualify for AIA or Full Expensing, and the rate of allowance depends on the vehicle’s CO₂ emissions:

Type of Car	Allowance Available
New zero-emission car (purchased before 1 April 2026)	100% first-year allowance
Second-hand electric car	18% WDA (main pool)
≤ 50g/km CO₂ emissions	18% WDA (main pool)
> 50g/km CO₂ emissions	6% WDA (special rate pool)

If you’re a sole trader or partner using a car partly for private purposes, only the business-use proportion of the allowance can be claimed.

Other Considerations: Short Life and Long Life Assets

You can elect to treat certain short-term assets separately (for example, tools or equipment you expect to sell within eight years). This allows faster relief if the item is sold for less than its remaining value.

For assets expected to last more than 25 years — such as heavy machinery or integral building features — long life asset rules apply, placing them in the special rate pool.

Making a Claim

Capital allowance claims must be made in your tax return.

Sole traders and partnerships must claim within 12 months after the 31 January filing deadline for the relevant year.

Companies must claim within two years of the end of their accounting period.

Sometimes, it’s not beneficial to claim the full amount immediately — for example, if doing so would waste other reliefs. Strategic planning ensures the best long-term outcome.

How We Help

The capital allowance rules are detailed and change regularly — especially around Full Expensing, environmentally efficient equipment, and property improvements.

At Your Accounting Club, we help business owners plan and claim capital allowances effectively — ensuring you claim every pound you’re entitled to, at the right time.

Whether you’re investing in new machinery, vehicles, or commercial property, we’ll help you structure your purchases to maximise tax relief and minimise wasted allowances.

📍 Based in Sudbury, Suffolk — supporting businesses locally and nationwide.

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