Capital allowances basics

What capital allowances are

Capital allowances let you deduct the cost of business assets (plant, machinery, fixtures) from your taxable profit, even though those costs are capital rather than revenue. They are how the tax system gives relief for capital investment.

The three main types

Annual Investment Allowance (AIA)

100% deduction in the year of purchase, up to £1 million per accounting period. Covers most plant and machinery — but not cars. Available to most businesses.

Full Expensing (companies only, since April 2023)

100% first-year deduction on new and unused qualifying plant and machinery, with no annual cap. Companies only — sole traders and partnerships use AIA. Disposing of the asset later may trigger a balancing charge.

Writing-Down Allowances (WDA)

For costs above the AIA limit, or assets that don't qualify for AIA or full expensing:

• Main pool: 18% writing-down allowance per year on a reducing balance
• Special rate pool: 6% per year (long-life assets, integral building features)

Cars are different

• Zero-emission cars: 100% first-year allowance
• Cars with CO2 ≤ 50g/km: main pool (18%)
• Cars with CO2 over 50g/km: special rate pool (6%)

Cars are excluded from AIA and full expensing.

Disposing of an asset

When you sell or scrap a pooled asset, the disposal proceeds reduce the pool balance. If proceeds exceed the pool balance, you get a balancing charge (added back to taxable profit).

For full expensing, disposal triggers a 100% balancing charge on disposal proceeds — making timing important.

Common errors

• Putting a car in the AIA claim by mistake
• Forgetting to claim AIA on integral features (lighting, heating, etc.) when fitting out premises
• Missing R&D capital allowance enhancements where eligible
• Not tracking pool balances year to year