Capital allowances allow UK businesses to claim tax relief on certain capital expenditures, helping them reduce their taxable profits. This means investments in assets like machinery, equipment, or property improvements can bring significant savings at tax time.
Knowing how to maximise these allowances is essential for effective business tax planning.
Businesses often overlook the full scope of what qualifies, missing opportunities to improve their cash flow. By understanding how capital allowances work and what expenses count, companies can make more informed decisions, retain more profit, and invest back into their growth.
Capital allowances provide businesses with tax relief for certain types of capital expenditure. These rules help companies to manage their taxable profits and encourage ongoing investment in productivity-enhancing assets.
Capital allowances are a form of tax relief available to businesses for specific qualifying capital expenditures, such as the purchase of machinery, equipment, plant, and certain vehicles. Instead of deducting the cost of these assets as an immediate expense, businesses can claim a proportion of the cost each year.
The main purpose of capital allowances is to support companies in investing in their operations.
By offering tax deductions on qualifying assets, the system aims to stimulate business growth, increase competitiveness, and encourage reinvestment within the economy.
These allowances are governed by tax legislation and require detailed record-keeping. Businesses must identify eligible assets and apply the correct rate of allowance to ensure compliance.
One significant benefit is the reduction of taxable profits, which can lower the company’s overall tax bill. This can free up cash flow for further investment, helping businesses fund upgrades or expansion.
Businesses can benefit from several types of capital allowances, such as the Annual Investment Allowance (AIA), First Year Allowances (FYA), and Writing Down Allowances (WDA). Each offers a different rate or scope of relief, depending on the type of asset and timing of the purchase.
Capital allowances are especially useful for small and medium-sized enterprises (SMEs), as they provide vital cash flow advantages. The ability to claim against a wide range of assets also gives businesses more flexibility in managing their investments.
To claim capital allowances, a business must incur qualifying capital expenditure. Typical eligible items include plant, machinery, equipment, and business vehicles, but not all assets qualify. Land, buildings, and leased assets are usually excluded.
The business must own the asset outright, and the expenditure must be for business purposes. Different rules may apply for certain categories, such as energy-saving or environmentally beneficial equipment, which may qualify for higher allowances.
Maintaining appropriate records and invoices is crucial. HMRC may request evidence to confirm eligibility, so accurate documentation ensures claims withstand scrutiny during any review or audit.
Different capital allowances enable businesses to claim tax relief on qualifying capital expenditure in various ways. The main categories are designed to suit different types and values of assets.
The Annual Investment Allowance (AIA) lets businesses deduct the full cost of qualifying plant and machinery from taxable profits up to a set annual limit. For 2025, the limit is £1 million. This provides immediate relief, making it attractive for businesses with significant investment in equipment.
A wide range of assets qualifies under the AIA, including office equipment, certain vehicles, and machines used in the business. However, some items such as company cars and items gifted to the business are excluded.
Each business or group of businesses can claim AIA only up to the annual limit within a single accounting period. If purchases exceed the cap, any remaining expenditure may be eligible for other types of allowances.
First-Year Allowances (FYA) offer enhanced tax relief for specific types of capital investment in the year the assets are purchased. They often provide 100% relief, meaning businesses can claim the full qualifying expenditure without waiting for annual allowances.
FYA is available on assets that are energy-efficient or environmentally beneficial, as defined by government criteria. This includes certain low-emission cars, energy-saving equipment, and water-saving devices.
The availability of FYA can change each tax year depending on government policy, so it is important for businesses to check the latest list of qualifying assets before making claims.
Writing Down Allowance (WDA) applies to any capital expenditure not covered by AIA or FYA. Businesses claim a percentage of the remaining value of an asset each year on a reducing balance basis.
The main rate for most plant and machinery is 18% per year. A special rate of 6% applies to other categories, such as some integral features of buildings and long-life assets. Cars with higher CO₂ emissions also usually fall under the special rate.
WDA provides ongoing tax relief, although the value of the write-off decreases over time as the asset’s value is reduced for tax purposes. This method spreads the benefit across several years.
The Structures and Buildings Allowance (SBA) gives tax relief on new construction costs or improvements to commercial structures and buildings. It covers costs that do not qualify as plant and machinery, such as building walls, roofs, and staircases.
Businesses can claim relief at a flat rate of 3% per year over a 33⅓-year period. The claimable amount is based on qualifying construction expenditure, and the asset must be used for qualifying business purposes.
It is important to keep detailed records of eligible construction costs, as not all building-related expenses qualify. Residential properties, land, and the cost of acquiring existing buildings are excluded from SBA.
Capital allowances apply to specific categories of business spending. The most common areas include plant and machinery, integral features of a building, and costs related to renovation or refurbishment.
Plant and machinery represent the largest group of assets eligible for capital allowances. This includes business equipment, vehicles (except cars with high CO₂ emissions), office furniture, and tools. Expenditure must be for assets owned and used in the business and not leased from another party.
Businesses should note that only capital expenditure qualifies, not day-to-day running costs. Assets must serve a business purpose, such as producing goods or delivering services. Items must be newly purchased or acquired for long-term use.
Special rules may apply for second-hand assets or those partly used for non-business purposes. Vehicles are subject to separate rates depending on emissions levels. Assets purchased under hire purchase agreements also qualify if ownership will eventually pass to the business.
Integral features are parts of a building essential to its function, like electrical systems, lighting, lifts, and air conditioning. These elements are eligible for capital allowances when installed or replaced in commercial premises.
Claiming for integral features is subject to defined rules. The expenditure must relate to installation, replacement, or upgrade, and the business must own the building or hold a long-term lease. Certain exclusions may apply, such as repairs rather than new installations.
A typical list of qualifying integral features includes:
Costs for these features are usually claimed under the plant and machinery allowances regime but are identified separately for tax reporting.
Expenditure on renovating or refurbishing business premises can qualify for capital allowances but only under specific conditions. The work must improve or modernise qualifying properties, such as shops or offices, rather than simply repair wear-and-tear.
Eligible costs include upgrading toilets, rewiring, new flooring, or improving disabled access. Cosmetic changes or routine maintenance do not qualify for capital allowances. The property must generally be used for business purposes, and in some cases, the business must not own the freehold but hold an interest such as a long lease.
The types of projects likely to qualify involve significant upgrades that extend the life or utility of the property. When in doubt, businesses are advised to review guidance to distinguish capital improvements from revenue repairs.
Claiming capital allowances allows businesses to deduct a portion of eligible capital expenditure from their taxable profits. To benefit from this tax relief, accurate claims and proper documentation are essential.
Businesses must submit claims for capital allowances through their annual tax returns. The claim should detail the qualifying expenditure, specify the assets, and indicate the amount being claimed for each asset category.
Only qualifying assets, such as machinery, equipment, and certain building improvements, can be included. The business must usually own the asset. There are exceptions for assets bought on hire purchase or through finance leases, but specific rules apply in those cases.
Each type of capital allowance (e.g., Annual Investment Allowance, Writing Down Allowance) must be claimed separately. It is vital to allocate expenditure to the correct category to obtain the full benefit. Businesses should ensure they claim within the deadline set by HMRC to avoid missing out on potential relief.
Maintaining comprehensive records is crucial when claiming capital allowances. Businesses need to keep detailed invoices, receipts, and contracts for all qualifying assets. Records should show the date of purchase, cost, and evidence of ownership or terms of hire purchase if applicable.
A clear asset register helps track which items have already had allowances claimed and which are still eligible. HMRC may request supporting documentation to verify claims, so all records must be accurate and accessible.
Proper organisation of these documents not only supports the claim but helps in case of a tax enquiry. Records must typically be kept for at least six years after the end of the relevant accounting period.
Claiming capital allowances requires careful attention to how assets are treated when they are disposed of and how expenditure is grouped. Both have direct implications for tax relief and compliance.
When an asset on which capital allowances have been claimed is sold or disposed of, a balancing adjustment is required. This ensures the correct amount of tax relief has been given based on the asset’s sale value compared to its written-down value.
The timing and calculation of these adjustments must follow HMRC’s rules precisely. Detailed records of original costs, past claims, and disposal proceeds are essential. Errors can lead to incorrect tax liability or missed relief.
Most plant and machinery expenditure is grouped into pools—typically, a main pool and, where appropriate, a special rate pool for assets such as integral features. Pooling allows businesses to claim a fixed percentage of the pool’s total value each year rather than tracking depreciation on each item individually.
Key points to note:
Pooling simplifies ongoing claims but requires consistency and attention to eligible asset types.
Capital allowances apply differently depending on the sector involved. Business type and the nature of assets being acquired both influence how allowances are claimed and the specific reliefs available.
Property investors can claim capital allowances on certain items within commercial properties, such as plant and machinery. Examples include air conditioning systems, lifts, lighting, and fire safety equipment.
These items must be integral to the running of the building rather than forming part of the structure itself, such as walls or windows.
Notable categories include main pool assets, generally written down at 18% per year, and special rate assets, written down at 6% per year. Residential property typically does not qualify, except for communal areas in blocks of flats.
Capital allowances cannot be claimed for the actual purchase price of the property. They apply only to eligible assets within or added to the property.
It’s important for investors to identify qualifying expenditure accurately, especially when acquiring or refurbishing a property.
Manufacturing businesses can utilise capital allowances for a broad range of assets required in production, including machinery, plant, vehicles, and computers. This sector often benefits significantly from allowances due to the scale and cost of industrial equipment investments.
Key allowances, such as the Annual Investment Allowance (AIA), allow most plant and machinery purchases (excluding cars) to be written off in full against taxable profits, up to an annual limit.
Assets not covered by AIA are typically allocated to either the main pool or special rate pool.
Manufacturers should maintain thorough records, ensuring each item is allocated to the correct allowance pool. Proper classification can help maximise tax relief and improve cash flow.
The UK capital allowances regime has seen notable developments in recent years. The 130% super-deduction for companies ended as planned on 31 March 2023, closing a period of enhanced deduction for qualifying plant and machinery expenditure.
A new incentive, called Full Expensing, was introduced in the Spring Budget 2023. This offers companies 100% first-year relief on qualifying new main rate plant and machinery investments until March 2026. The aim is to encourage immediate business investment by improving cash flow.
| Measure | Description | Status |
|---|---|---|
| Super-deduction | 130% first-year allowance | Ended March 2023 |
| Full Expensing | 100% first-year allowance | Available until March 2026 |
The government reaffirmed in the Autumn Budget 2024 that the current capital allowances system, including Full Expensing, would be maintained. Policymakers have described the regime as “generous” and seek to support business investment.
Future discussions may focus on whether these allowances will become a permanent feature. Businesses are encouraged to monitor government announcements for further updates on capital allowances beyond March 2026.
Capital allowances in the UK are a crucial part of business tax planning, impacting how companies handle expenditure on fixed assets. Rules, rates, and eligibility can vary depending on asset type, recent legislative changes, and specific business circumstances.
The main rate of writing down allowance is currently 18% per annum on a reducing balance basis for most plant and machinery.
Special rate assets, such as integral features, receive a lower rate of 6%. The Annual Investment Allowance (AIA) allows up to £1 million of qualifying expenditure to be written off each year.
The allowance for business vehicles is determined by the vehicle’s CO2 emissions. Cars with zero emissions qualify for a 100% first-year allowance.
Other cars generally fall into either the 18% or 6% writing down allowance pools, depending on their emissions rating.
Plant and machinery covers a broad range of items used in the business, such as machines, office equipment, furniture, and integral building features like heating or lighting systems. Land, buildings themselves, and items used only for business entertainment are excluded.
For a commercial building costing £500,000, if £100,000 relates to qualifying plant and machinery fixtures, that portion may be claimed through the AIA in the year of purchase, subject to the current limit.
The remaining qualifying expenditure is added to the relevant pool and written down at the appropriate rate in future years.
The AIA limit was previously subject to temporary increases, but as of April 2023, it was set at £1 million per year for qualifying expenditure. Businesses can claim this up to the limit each tax year, but spending above this amount reverts to the standard writing down allowance rates.
HMRC defines capital allowances as a form of tax relief that enables businesses to deduct the cost of certain capital assets from their taxable profits. Unlike standard business expenses, these deductions are spread over time according to the specific rules for each type of asset and allowance.
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