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.

What counts as plant and machinery?

Plant and machinery means items you keep to use in your business. The main groups are:

• equipment and machinery
• business vehicles, including vans, lorries and cars
• integral features of a building: lifts, escalators, space and water heating systems, air-conditioning, hot and cold water systems (not toilet and kitchen facilities), electrical and lighting systems, and external solar shading
• some fixtures, such as fitted kitchens, bathroom suites, fire alarms and CCTV

You cannot claim plant and machinery allowances on things you lease (unless under hire purchase or a long funding lease), items used only for business entertainment, land, structures such as bridges and roads, or buildings themselves. Repairs are a business cost, not a capital allowance. Care businesses have special rules. A sole trader or partnership using the cash basis can only claim capital allowances on business cars. See the GOV.UK guide to capital allowances.

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.

The £1 million is for each accounting period. If your period is longer or shorter than 12 months, adjust it: a 9-month period gives £750,000 (9/12 x £1,000,000). You can only claim the AIA in the period you bought the item. The purchase date is the date you signed the contract if payment is due within 4 months, or the payment due date if it is more than 4 months later. Under hire purchase, you claim for all the payments you will make once you start using the item, but not the interest. Two or more limited companies controlled by the same person get one AIA between them. If you do not want to claim the full cost, you can claim part as AIA and part as writing-down allowances.

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.

The item must be new and unused and must not be a car. A company can also claim a 50% first-year allowance on qualifying special rate assets, but not both allowances on the same cost.

Writing-Down Allowances (WDA)

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

• Main pool: 14% writing-down allowance per year on a reducing balance (18% for periods before April 2026)
• 40% first-year allowance for new main pool plant and machinery bought from 1 January 2026 (not cars or second-hand assets)
• Special rate pool: 6% per year (long-life assets, integral building features)

With the 40% first-year allowance, you claim 40% of the cost in the first year and then writing-down allowances on the remaining 60% in the next accounting period.

Worked example: the main pool

Your main pool starts the period at £9,000. You buy a machine for £1,200, so the pool is £10,200. You sell a desk for £200, so the pool is £10,000. At the 14% main rate you can claim £1,400 (14% of £10,000). The remaining £8,600 is carried forward as the opening balance for the next period. If a pool is £1,000 or less before you work out the allowance, you can claim the whole balance as a small pools allowance instead.

Cars are different

• Zero-emission cars: 100% first-year allowance on new and unused cars bought before April 2027
• Cars with CO2 ≤ 50g/km: main pool (14% from April 2026)
• 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.

If you originally claimed 100% of the cost under the AIA or a first-year allowance and the pool is empty, the whole sale value is a balancing charge. If you claimed writing-down allowances, the sale value comes off the pool and any excess is a balancing charge. When you close a business you enter a balancing charge or balancing allowance on the final return instead of claiming allowances.

How to claim capital allowances

A limited company claims on its Company Tax Return and must include a separate capital allowances calculation. Sole traders claim on their Self Assessment return and partnerships on the partnership return. The AIA, 100% first-year allowances, full expensing and the 40% first-year allowance must be claimed in the accounting period you bought the item. Writing-down allowances can be claimed at any time while you still own it, and you do not have to claim the full amount. See our guide to the CT600 and our Corporation Tax service. See also capital allowances explained for directors.

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