Capital Allowances: The Basics

Capital allowances can significantly reduce your tax bill by letting you deduct the cost of business equipment and other qualifying assets from your profits before you pay tax. Instead of claiming these purchases as business expenses, you claim capital allowances on items you keep to use in your business, such as machinery, equipment, and business vehicles. Understanding which allowances you can claim and how they work will help you maximise your tax relief.

What are capital allowances?

Capital allowances are a type of tax relief that lets you deduct some or all of the value of certain business assets from your profits before you pay tax. These assets—known as 'plant and machinery'—are items you keep to use in your business rather than things you buy and sell as part of your trade.

You claim capital allowances separately from your business expenses. Day-to-day running costs, items you buy to sell on, and interest payments on asset finance should be claimed as business expenses instead (or deducted from profits if you're a limited company).

Which assets qualify?

Capital allowances can be claimed on plant and machinery, which includes:

Equipment and machinery
Business vehicles such as vans, lorries, and business cars
Costs of demolishing plant and machinery
Integral features of buildings
Certain fixtures
Alterations to a building to install plant or machinery (but not repairs)

Integral features

Integral features are parts of a building considered essential to its function:

Lifts, escalators and moving walkways
Space and water heating systems
Air-conditioning and air cooling systems
Hot and cold water systems (excluding toilet and kitchen facilities)
Electrical systems, including lighting
External solar shading

Fixtures

You can claim for fixtures like fitted kitchens, bathroom suites, and fire alarm or CCTV systems. You can claim whether you rent or own the building, but only the person who bought the item can claim. When buying a building from a previous business owner, you can usually only claim for integral features and fixtures they claimed for, and you must agree the value of these fixtures with the seller—if you don't, you cannot claim for them.

What you cannot claim on

Capital allowances are not available for:

Items you lease (unless under a hire purchase contract or long funding lease)
Items used only for business entertainment (such as a yacht or karaoke machine)
Land
Structures like bridges, roads, or docks
Buildings themselves, including doors, gates, shutters, and mains water and gas systems

You may be able to claim a 3% structures and buildings allowance on some non-residential buildings instead.

Special rules for residential property landlords

If you let residential property, you can only claim capital allowances for items used in communal parts of buildings with multiple residential units. For example, you can claim for a table or lift in the entrance hallway of a block of flats, but not for items in individual flats.

Special rules for cash basis users

If you're a sole trader or partnership using cash basis accounting, you can only claim capital allowances on business cars—not on other plant and machinery.

Annual Investment Allowance (AIA)

The Annual Investment Allowance lets you deduct the full value of qualifying plant and machinery from your profits in the year you buy it. You can claim AIA on up to £1 million of qualifying expenditure.

AIA covers most plant and machinery, but you cannot claim it on:

Business cars
Items you owned for another reason before using them in your business
Items given to you or your business

If you sell an item after claiming AIA, you may need to pay tax on the disposal.

Writing down allowances

Writing down allowances let you deduct a percentage of an item's value from your profits each year. You use writing down allowances when an item doesn't qualify for AIA or another allowance, or when there's remaining value after claiming the maximum amount of another allowance.

To claim writing down allowances, you group items into 'pools' based on which rate they qualify for. You must calculate what you can claim separately for each pool.

Main pool

The main pool covers most plant and machinery at a rate of:

18% before 1 April 2026 (for Corporation Tax) or 6 April 2026 (for Income Tax)
14% from those dates onwards

Items go in the main pool unless they qualify for the special rate pool or a single asset pool.

Special rate pool

The special rate pool has a rate of 6% and covers:

Integral features
Items with a useful life of at least 25 years (if the total value of long-life items you buy in an accounting period exceeds £100,000)
Solar panels
Thermal insulation added to a building
Cars with CO2 emissions over certain thresholds

If you're in a partnership where one or more members is a limited company, all long-life items go in the special rate pool regardless of value.

Single asset pools

You may need to create separate pools for individual assets that:

Have a short life (items you won't keep for a long time)
You also use outside your business (if you're a sole trader or in a partnership)

Short life assets receive the main rate of 18% (or 14% from April 2026). You can choose to treat items as short life assets, but not cars, items you use outside your business, or special rate items. The pool ends when you sell the asset, letting you claim allowances over a shorter period. If you still have the item after 8 years, move the balance into your main pool.

For items you use partially outside your business, reduce your claim by the proportion of private use. For example, if you use a laptop 50% of the time for personal matters, reduce your capital allowances claim by 50%.

How to calculate writing down allowances

For each pool:

1. Start with the closing balance from your last accounting period

2. Add the value of anything bought or received that qualifies for this pool (include VAT only if you're not VAT registered)

3. Deduct the value of anything sold or disposed of

4. Calculate your allowance using the correct rate for that pool

5. Deduct the amount you can claim to get the closing balance (the 'tax written down value')

6. Use this as the opening balance for the next accounting period

Example: Your main pool opening balance is £9,000. You buy a machine for £1,200, giving a total of £10,200. You sell a desk for £200, leaving £10,000. At 18%, you can claim £1,800. Your closing balance is £8,200.

Other capital allowances

Beyond plant and machinery, you can claim capital allowances for:

Extracting minerals
Research and development
'Know-how' (intellectual property about industrial techniques)
Patent rights
Dredging
Structures and buildings
Renovating unused business premises in disadvantaged areas of the UK

How to claim

Limited companies claim capital allowances on their Company Tax Return. Sole traders and partnerships claim on their Self Assessment tax return. If you're a limited company creating a short life asset pool, notify HMRC within 2 years of the end of the tax year when you bought the item. Sole traders and partnerships must notify HMRC in writing by the online filing deadline (31 January) for the tax year after purchase.

Keep records of items you've claimed AIA or first year allowances on in the appropriate pool, even if you've claimed the full cost and written their value down to zero. This helps you work out whether you owe tax if you sell the asset later.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.