Capital allowances

Capital allowances are a form of tax relief available when a business buys certain assets that it keeps and uses in the business.

Qualifying assets can include:

• machinery and equipment;
• computers and other business equipment; and
• some business vehicles.

The amount and type of capital allowance you can claim depends on the asset and the circumstances of the business.

Unlike everyday business expenses, the cost of buying certain assets isn’t normally deducted directly from taxable profits as an expense. Instead, you may be able to claim capital allowances for some or all of the cost.

Capital allowances reduce your taxable profits, which can reduce the Income Tax or Corporation Tax your business has to pay.

The type of capital allowance you can claim depends on the asset, when it was purchased and the type of business. The main allowances include the Annual Investment Allowance (AIA) and first-year allowances

• The Annual Investment Allowance (AIA) allows businesses to deduct the full cost of most qualifying plant and machinery from their taxable profits in the accounting period in which it is purchased, up to the annual AIA limit. Most plant and machinery qualifies, including many items of equipment and integral features. Cars do not qualify for AIA, although some other business vehicles do.
• Some qualifying expenditure can receive tax relief in the year it is purchased through a first-year allowance (FYA).

The allowances available depend on the type of asset and business. For example:

• companies can claim full expensing on certain new and unused plant and machinery;
• companies can claim a 50% first-year allowance on certain new special-rate plant and machinery;
• a 40% first-year allowance is available to businesses for certain new and unused main-rate plant and machinery purchased from 1 January 2026; and
• a 100% first-year allowance is available for certain qualifying assets, including new and unused zero-emission cars.

If you don’t claim the full cost of an asset using AIA or a first-year allowance, you may be able to claim writing-down allowances (WDAs). These allow you to deduct a percentage of the remaining value from your taxable profits each year.

The rate depends on the type of asset and the capital allowance pool it belongs to. For example, there are different rates for main-rate and special-rate expenditure.

If you’re a sole trader or a member of an ordinary partnership, how you claim for the cost of business assets can depend on the accounting method you use.

If you use cash basis accounting, most equipment you buy and keep for the business is normally treated as a business expense rather than claimed through capital allowances. However, cars are treated differently, and you may be able to claim capital allowances on them.

If you use traditional accounting, you may be able to claim capital allowances on qualifying assets such as equipment, machinery and business vehicles.

If an asset is also used privately, the amount of capital allowances you can claim may need to be restricted to reflect its business use.

Once you’ve worked out the capital allowances your business can claim, you normally claim them through your tax return:

• Self Assessment tax return if you’re a sole trader
• Partnership tax return if you’re a partner
• Company Tax Return if you’re a limited company , including a separate capital allowances calculation.

The rules determine which accounting period an asset is treated as being purchased in. This will usually depend on when you entered into the contract and when payment became due. Different rules can apply to assets bought under hire purchase agreements or with extended payment terms.

You don’t always have to claim the maximum capital allowances available. Depending on your circumstances, you may choose to claim less or defer some relief to a later period.