Capital allowances are a vital tax relief for UK businesses investing in assets, enabling them to reduce their taxable profits. In 2023/24, UK companies claimed over £25 billion in capital allowances, underscoring their importance in business finance and tax planning.
| Type of Capital Allowance | Main Rate | Assets Covered | Notes |
|---|---|---|---|
| Writing Down Allowance (WDA) - Main Pool | 18% | Most plant and machinery | Applied annually to reducing balance |
| Writing Down Allowance - Special Rate Pool | 6% | Long-life assets, integral features | Lower rate due to asset nature |
| Annual Investment Allowance (AIA) | 100% up to £1,000,000 | Most plant and machinery | Full expensing on qualifying expenditure |
| First Year Allowance (FYA) - Full Expensing | 100% | New low-emission cars, energy-saving equipment | 100% write-off in first year |
What Are Capital Allowances?
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Use Free Tax Calculator →Capital allowances enable UK businesses to claim tax relief on certain capital expenditure by writing off the cost of qualifying assets against taxable profits. Rather than deducting the full cost immediately as revenue expenditure, capital allowances spread the relief over several years according to prescribed rates.
The assets typically include plant and machinery used in the business, such as machinery, equipment, vehicles, and integral features of buildings. Claiming capital allowances correctly can significantly reduce your corporation tax or income tax liability, enhancing cash flow and business growth potential.
Understanding Writing Down Allowances
Writing Down Allowances (WDAs) are the most common form of capital allowance after the Annual Investment Allowance (AIA). WDAs apply to the reducing balance of assets in what are known as 'pools'. Each year, businesses deduct a percentage of the remaining balance as a tax relief.
There are two main pools for WDAs:
- Main pool: Most plant and machinery assets are included here and attract an 18% WDA on a reducing balance basis.
- Special rate pool: Includes long-life assets, integral features of buildings, and certain cars with CO2 emissions over 50g/km. These receive a lower 6% WDA.
This distinction matters because the lower 6% rate means relief is spread over a longer period, impacting your tax planning.
How Pools Work
When you buy qualifying assets, you add their cost to the relevant pool. At the end of the accounting period, you claim WDAs on the pool balance. When you dispose of an asset, you deduct its sale price from the pool. If the pool balance becomes negative, you claim a balancing allowance to write off the remaining amount.
Maximising the Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) provides 100% relief on qualifying expenditure, allowing you to deduct the full cost of assets from your profits in the year of purchase. For the 2026/26 tax year, the AIA limit is set at £1,000,000.
This generous limit means many small and medium businesses can fully expense their plant and machinery investments immediately, improving cash flow and reducing tax bills.
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To maximise your AIA claim:
- Plan the timing of your asset purchases to utilise the full AIA limit within your accounting period.
- Ensure assets qualify—plant and machinery are generally eligible, but buildings and cars over 50g/km CO2 are excluded.
- Keep detailed records of expenditure and asset descriptions for HMRC compliance.
Exceeding the AIA limit means the excess expenditure is added to the appropriate writing down allowance pool and claimed at the reducing balance rate.
Full Expensing and First Year Allowances
First Year Allowances (FYA), sometimes known as full expensing, allow businesses to claim 100% of the cost of qualifying assets in the year of purchase. This is separate from the AIA and applies to specific categories.
For 2026/27, assets eligible for 100% FYA include:
- New low-emission cars with CO2 emissions up to 50g/km
- Energy-saving equipment and water-efficient technologies as listed by HMRC
- Certain business vehicles and electric charge points
Full expensing provides immediate cash flow benefits, making it an attractive option for green investments.
Claiming Capital Allowances: Step-by-Step
Claiming capital allowances correctly is essential to maximise your tax relief. Here are practical steps to follow:
- Identify qualifying expenditure: Review your asset purchases and separate qualifying plant and machinery from non-qualifying assets.
- Allocate assets to pools: Assign assets to the main pool, special rate pool, or claim AIA or FYA where applicable.
- Calculate allowances: Apply the relevant rates to each pool's balance for your accounting period.
- Adjust for disposals: Deduct asset sale proceeds from the pool and claim balancing allowances if necessary.
- Include claims in your tax return: For companies, incorporate capital allowances in your Corporation Tax return (CT600). Sole traders and partnerships claim via the self-assessment tax return.
- Keep records: Maintain detailed invoices, asset registers, and calculations to support your claims in case of HMRC enquiries.
Special Considerations and Common Mistakes
While capital allowances are straightforward for many businesses, some common pitfalls can reduce your claim:
- Incorrect asset classification: Misclassifying assets can lead to missing out on higher allowances or claiming disallowed costs.
- Ignoring disposal adjustments: Failing to adjust pools after asset sales can cause over-claiming or under-claiming.
- Overlooking integral features: Integral features like heating, lighting, and lifts are treated as special rate assets and require correct pooling.
- Not claiming the full AIA: Many businesses miss out by not planning expenditure within the AIA limit.
Consulting HMRC guidance on capital allowances and seeking professional advice can help you avoid these errors and optimise your tax position. For more detailed tax planning, see our Corporation Tax Guide.
- Capital allowances reduce taxable profits by allowing tax relief on qualifying capital expenditure.
- The Annual Investment Allowance (AIA) lets you claim 100% relief on up to £1,000,000 of plant and machinery in 2026/26.
- Writing Down Allowances apply to assets not fully covered by AIA, with main pool at 18% and special rate pool at 6% reducing balance rates.
- First Year Allowances (Full Expensing) provide 100% relief on specific green and low-emission assets.
- Careful record-keeping and correct asset classification are essential to maximise claims and avoid HMRC penalties.
What assets qualify for the Annual Investment Allowance?
Most plant and machinery used in your business qualify for the AIA, including equipment, tools, and some vehicles. However, buildings, land, and cars with CO2 emissions above 50g/km are excluded. Refer to HMRC guidance for a full list of qualifying assets.
How do I claim capital allowances on my tax return?
Companies claim capital allowances via the Corporation Tax return (CT600), while sole traders and partnerships include claims in their self-assessment tax returns. You must keep accurate records of expenditure and calculate allowances correctly according to HMRC rules.
Can I claim capital allowances on second-hand assets?
Yes, second-hand plant and machinery generally qualify for capital allowances, including AIA and WDAs, as long as they are used in the business. Ensure to keep purchase invoices and asset details for HMRC verification.
Official Sources
* GOV.UK: Set up a business · * HMRC: Income Tax rates · * HMRC: Corporation Tax · * HMRC: VAT registration