Capital Allowances Explained

What capital allowances actually are

Capital allowances replace accounting depreciation for tax purposes. You don’t deduct depreciation from your profits; you claim capital allowances instead.

One thing to be clear about before any of the numbers below make sense: capital allowances reduce your taxable profit. They are not a refund, a grant, or money back from HMRC. A £60,000 deduction takes £60,000 off taxable profit; it doesn’t hand back £60,000, and you still have to fund the purchase.

What a deduction is worth therefore depends on the rate the profit it removes would have been taxed at — and for a company that is not one number. Corporation Tax is 19% where profits are £50,000 or less, and 25% where they exceed £250,000. Between those thresholds Marginal Relief tapers between the two, and it has a consequence worth knowing: each £1 of profit removed inside that band saves 26.5p, which is more than the main rate, not less.

So the same £60,000 deduction is worth £15,900 to a company with £200,000 of profit, £15,000 to one whose profits stay comfortably above £250,000, and less again on the small profits rate. Both thresholds are reduced for short accounting periods and divided between associated companies, so work out which rate your own profits attract before relying on any of these figures.

Annual Investment Allowance (AIA): the main one

AIA gives 100% relief on up to £1 million of qualifying plant and machinery per accounting period. That limit is permanent — there’s no expiry to plan around.

For most small businesses this means equipment purchases are effectively fully deductible in the year you buy them: tools, machinery, computers, office furniture, vans.

Three details that catch people out:

• The £1 million limit applies per business, not per asset. Buy one machine at £500,000 or ten items totalling £1 million — the same cap applies.
• A group of companies gets one £1 million allowance between them, and so do companies controlled by the same person that are related — broadly, sharing premises or carrying on similar activities. You can’t multiply it through a group structure.
• A sole trader or partnership with more than one business usually gets an allowance for each — but only one if the businesses are controlled by the same person and are either in the same premises or have similar activities.

Writing Down Allowances: what changed in 2026

Where AIA doesn’t apply — spending above the limit, or assets that don’t qualify — the cost goes into a pool and is written down by a percentage each year on a reducing balance.

• Main pool: 14% — reduced from 18%, effective 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.
• Special rate pool: 6% — integral building features, long-life assets, solar panels, thermal insulation, and higher-emission cars.

If your accounting period straddles the change date, a hybrid rate applies, weighted by the number of days falling either side of it.

There’s no requirement to claim capital allowances, or to claim the full amount available.

The new 40% First Year Allowance

From 1 January 2026, a 40% first-year allowance applies to new main-rate plant and machinery. It was introduced partly to offset the reduction in the main-pool writing-down rate.

It excludes second-hand assets, cars, and assets leased overseas.

Announced at Budget 2026 (28 October 2026), not yet law: the 40% first-year allowance rises to 50% for expenditure incurred on or after 1 January 2027, and the main-pool writing-down rate falls from 14% to 12% for accounting periods beginning on or after 1 April 2027 (Corporation Tax) or 6 April 2027 (Income Tax), with a hybrid rate for periods that straddle the change. These are announcements, not yet law; the rates on this page apply until the changes take effect.

In practice the 40% allowance rarely beats a valid AIA claim — it mainly helps businesses that have used up their AIA, or that couldn’t access full expensing (unincorporated businesses, leasing and hire businesses).

Cars are the exception (the part most people get wrong)

This is the single most important thing on this page.

Cars are excluded from the Annual Investment Allowance, from full expensing, and from the new 40% first-year allowance. Relief on a car follows its CO2 emissions, not its price.

Cars bought before April 2021 used higher CO2 limits for the main pool (110g/km for cars bought from April 2018, 130g/km from April 2013, 160g/km from April 2009); GOV.UK’s business cars guidance has the table for each period.

The gap between those outcomes is not a rounding difference. On a £45,000 car bought on the same day by the same business, the new electric one gives the full deduction in year one. A petrol equivalent releases 6% of a shrinking balance and takes well over a decade to deliver comparable relief.

Worth repeating here, next to the figures: a capital allowance reduces taxable profit — it is not cash back. The £45,000 electric car above gives a £45,000 deduction in year one — worth £11,250 at the 25% main rate, or £11,925 to a company inside the Marginal Relief band, not £45,000 returned.

Vans are treated differently. A van is generally plant and machinery rather than a car, so it normally qualifies for AIA — meaning the full cost can usually be deducted in the year of purchase.

Private use depends on who uses the car. If you are a sole trader or partner and you also use the car outside your business, you claim based on the amount of business use: use it 60% for business and you claim 60% of the allowance. If your business provides a car for an employee or director, you can claim capital allowances on the full cost; you may need to tell HMRC the car is a company benefit if they use it personally.

Pool cars

A car that meets HMRC’s pool-car conditions may avoid a benefit-in-kind charge — but it is still a car for capital allowances purposes. No AIA, no full expensing. The CO2-based rules above apply exactly as they would to any other car.

Full expensing (companies only)

Full expensing gives 100% relief with no cap on new main-rate plant and machinery, and is permanent. It is available to companies within the charge to Corporation Tax.

It excludes second-hand assets, cars, and assets provided for leasing. For companies spending above the £1 million AIA limit, it’s the most generous relief available.

Which expense are you weighing up?

These pages apply the rules above to specific purchases, with separate answers for sole traders, limited companies and employees:

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