Capital Allowances Explained
When you buy something lasting for your business — a laptop, a van, machinery, a car — you usually can’t just deduct it as a running cost. It goes through capital allowances, a separate mechanism that decides how much of the cost you can set against your profits and when. Most equipment can be deducted in full in the year you buy it. Cars are the deliberate exception, and the difference can be worth thousands.
Read this first: capital allowances reduce your taxable profit. They are not a refund, a grant, or money back from HMRC. A £60,000 deduction saves a company paying Corporation Tax at 25% up to £15,000 in tax — it doesn’t hand back £60,000. You still have to fund the purchase.
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 saves a company paying Corporation Tax at 25% up to £15,000 in tax — it doesn’t hand back £60,000. You still have to fund the purchase.
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.
Two 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.
- Connected companies and partnerships share a single £1 million allowance. You can’t multiply it through a group structure.
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.
In practice it 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.
| The car | How relief works |
|---|---|
| New, unused, zero-emission | 100% first-year allowance — the full cost in year one (available until 31 March 2027 for Corporation Tax, 5 April 2027 for Income Tax). |
| CO2 of 50g/km or less, including second-hand electric | Main pool — 14% a year on the reducing balance. |
| CO2 above 50g/km | Special rate pool — 6% a year on the reducing balance. |
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, which at 25% Corporation Tax is up to £11,250 of tax saved, 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: where a car is used partly privately, you claim only the business proportion. Use it 60% for business and you claim 60% of the allowance.
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:
Not sure how yours is treated?
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AIA is £1m per accounting period and permanent. The main-pool writing-down allowance reduced from 18% to 14% from 1 April 2026 (Corporation Tax) and 6 April 2026 (Income Tax), with a hybrid rate for accounting periods straddling the change; the special rate pool is 6%. A 40% first-year allowance for new main-rate plant and machinery applies from 1 January 2026, excluding second-hand assets, cars and assets leased overseas. Cars are excluded from AIA, full expensing and the 40% first-year allowance; new unused zero-emission cars qualify for a 100% first-year allowance until 31 March 2027 (Corporation Tax) / 5 April 2027 (Income Tax). Cars with CO2 of 50g/km or less go to the main pool; above 50g/km to the special rate pool. Sources: GOV.UK Autumn Budget 2025 capital allowances measure; HMRC capital allowances guidance. Last checked 15 September 2026.