What Are Capital Allowances?
Capital allowances are tax deductions that allow businesses to write off the cost of certain capital assets against their taxable profits. When a business buys equipment, machinery, vehicles, or other qualifying assets, it cannot deduct the full cost as a revenue expense. Instead, it claims capital allowances over time (or immediately, depending on the type of allowance).
Capital allowances apply to both companies paying corporation tax and unincorporated businesses (sole traders and partnerships) paying income tax.
Types of Capital Allowances
Full Expensing (Companies Only)
Since April 2023, full expensing has been available permanently for UK companies. It allows 100% first-year relief on qualifying plant and machinery:
| Rate | Applies To |
|---|---|
| 100% full expensing | Main rate pool assets (most plant and machinery) |
| 50% first-year allowance | Special rate pool assets (long-life assets, integral features) |
Full expensing means a company can deduct the entire cost of qualifying plant and machinery in the year of purchase. This is only available to companies — sole traders and partnerships must use the Annual Investment Allowance or writing down allowances.
Annual Investment Allowance (AIA)
The Annual Investment Allowance provides 100% relief on qualifying plant and machinery expenditure up to £1 million per year. It is available to all businesses — companies, sole traders, and partnerships.
| Feature | Detail |
|---|---|
| Annual limit | £1 million |
| Rate | 100% first-year deduction |
| Available to | All businesses |
| Qualifying assets | Most plant and machinery (not cars) |
The AIA is particularly important for sole traders and partnerships who cannot claim full expensing.
Writing Down Allowances (WDA)
Expenditure that does not qualify for full expensing or exceeds the AIA is added to a capital allowances pool and written down annually:
| Pool | Annual Rate | Assets |
|---|---|---|
| Main rate pool | Main rate, reducing balance | Most plant and machinery, fixtures, vans |
| Special rate pool | 6% reducing balance | Long-life assets, integral features, thermal insulation |
| Single asset pools | Main or special rate | Short-life assets (by election) and assets with private use |
The reducing balance method means the allowance is calculated on the remaining balance each year, not the original cost. The main rate is set in legislation and has changed over time; HMRC’s capital allowances guidance on GOV.UK shows the rate for your accounting period.
Small Pools Allowance
If the balance of the main rate or special rate pool is £1,000 or less, the entire balance can be written off in one year instead of continuing with the reducing balance calculation.
Qualifying Expenditure
Plant and Machinery
Capital allowances are primarily available on plant and machinery, which includes:
- Office equipment — desks, chairs, computers, printers
- Tools and machinery — industrial equipment, manufacturing tools
- Vehicles — vans, lorries, motorcycles (cars have special rules)
- Fixtures — fitted kitchens, bathroom fittings in commercial properties
- IT systems — servers, software, networking equipment
- Agricultural equipment — tractors, irrigation systems
Integral Features
Integral features of buildings attract the special rate (6%) rather than the main rate. These include:
- Electrical systems (including lighting)
- Cold and hot water systems
- Heating, ventilation, and air conditioning
- Lifts and escalators
- External solar shading
Structures and Buildings Allowance (SBA)
A separate Structures and Buildings Allowance provides relief on the cost of constructing or renovating commercial structures:
| Feature | Detail |
|---|---|
| Rate | 3% straight-line per year |
| Total relief period | 33.3 years |
| Qualifying structures | Commercial buildings, warehouses, walls, bridges, tunnels |
| Does not apply to | Dwellings, land cost |
The SBA was introduced in 2018 and applies to construction costs incurred on or after 29 October 2018.
Cars
Cars have specific rules and do not qualify for the AIA or full expensing:
| CO2 Emissions | Allowance |
|---|---|
| 0 g/km (fully electric) | 100% first-year allowance while the relief is available |
| 1 to 50 g/km | Main rate pool (writing down) |
| Over 50 g/km | 6% special rate pool (writing down) |
For company cars, the tax treatment for employees is governed separately through the benefit in kind rules. From a capital allowances perspective, the CO2 emissions determine the rate of relief.
How to Claim
Companies
Companies claim capital allowances through their corporation tax return (CT600). A capital allowances computation is prepared as part of the tax calculations and submitted with the return.
Sole Traders and Partnerships
Sole traders and partnerships claim capital allowances through their self-assessment tax return. The capital allowances section calculates the deductions available from the capital expenditure incurred during the year.
Timing
Capital allowances are claimed for the accounting period (companies) or tax year (individuals) in which the expenditure is incurred. Expenditure is incurred when the obligation to pay becomes unconditional, which is usually when the asset is delivered or the service is performed.
Balancing Charges and Allowances
When an asset is sold or disposed of, a balancing adjustment is needed:
- If the sale proceeds exceed the remaining pool value, a balancing charge arises — this is effectively added back to taxable profits
- If the pool value exceeds the sale proceeds, a balancing allowance is available — the difference is deducted from taxable profits
For assets in the main or special rate pools, balancing adjustments only arise when the business ceases trading. During ongoing trade, sale proceeds are simply deducted from the pool balance.
Private Use
If an asset is used partly for business and partly for personal purposes:
- The capital allowance is restricted to the business-use proportion
- The asset is placed in a single asset pool rather than the main or special rate pool
- The private-use proportion is not deductible
This commonly applies to sole traders who use a vehicle for both business and personal travel.
Leased Assets
Capital allowances are generally available to the owner of the asset, not the user. For leasing arrangements:
- Hire purchase — the hirer can claim capital allowances as if they own the asset
- Finance leases — the lessee may claim capital allowances in some circumstances
- Operating leases — the lessor claims capital allowances; the lessee deducts the lease payments as a revenue expense
Interaction with Other Allowances and Reliefs
- R&D tax relief — expenditure claimed as R&D relief cannot also be claimed as capital allowances
- AIA — works alongside full expensing; the AIA is applied first to special rate expenditure (since full expensing gives only 50% on these assets)
- VAT — if the business is VAT-registered, capital allowances are claimed on the net (VAT-exclusive) cost, since the VAT is reclaimed through the VAT return
Record Keeping
Businesses must maintain records of all capital expenditure, including:
- Purchase invoices and proof of payment
- Asset registers listing each asset, its cost, pool allocation, and allowances claimed
- Disposal records including sale proceeds and dates
- Private use logs for assets with mixed use
These records must be kept for at least 6 years (companies) or 5 years from 31 January following the tax year (individuals). Accurate accounting records are essential for preparing the capital allowances computation and supporting it in the event of an HMRC enquiry.