Capital Allowances represent an important tax relief available to businesses in the UK, which enables the deduction of qualifying capital expenditure from taxable profits. When businesses invest in equipment, machinery or property improvements, the cost can feel heavy upfront. This is where capital allowance relief becomes a powerful and underused tax tool.
Understanding the capital allowances, their procedure and approaches to claiming capital allowances is necessary. It can make a meaningful difference to cash flow and long-term planning. HMRC does not generally allow accounting depreciation as a tax deduction. Capital allowances exist to ensure that businesses can receive tax relief on long-term investments.
What are Capital Allowances and Why do They Matter?
Capital allowance is a form of tax relief that allows businesses to claim deductions for the cost of assets used in their trade or business over an extended period. It is applicable when a business spends money on assets expected to last more than one year. These assets might include machinery, computers, tools, fixtures or certain elements within commercial buildings. Instead of spreading tax relief informally through depreciation, HMRC requires businesses to use capital allowances and claim relief in a structured way. In the 2023-24 tax year, UK businesses claimed approximately £157.2 billion in capital allowances. It highlights their central role in corporate tax planning.
How Does Capital Allowance Work in Practice?
Capital Allowance ensures your business investment translates into real tax relief. The system operates through the allocation of qualifying expenditure into designated pools. When you purchase a qualifying asset, HMRC does not allow you to deduct the cost in the way of everyday expenses. Instead, that cost is claimed through capital allowances and is calculated separately to reduce your taxable profits.
It is important to note that capital allowances are not applied automatically. You need to add a capital allowances claim to your tax return. Once claimed, capital allowances reduce the profit figure on which tax is calculated. This is also useful in directly lowering your Corporation Tax liability and improving short-term cash flow. Allowances are applied according to the asset category and applicable rules, which are as follows:
- Certain expenditures qualify for immediate full or substantial relief in the year of acquisition
- Remaining balances are subject to annual writing-down allowances on a reducing-balance basis.
- Claims must be made explicitly in the relevant tax return, with unused allowances carried forward indefinitely.
Capital Allowances in the UK: Main Types, Current Framework & Rates
Different assets attract different capital allowance rates. The administration has been refined through successive fiscal measures. Following the Autumn Budget 2025, key elements include the continuation of abundant conditions alongside targeted adjustments to support investment incentives. The following table summarises the principal rates and provisions in effect as of 2026 and has changes that are announced in the Autumn Budget 2025:
| Allowance Type | Rate / Relief | Applicable Assets | Key Notes |
|---|---|---|---|
| Annual Investment Allowance (AIA) | 100% up to £1 million | Most plant and machinery (excluding cars in certain cases) | Permanent commitment for the current Parliament |
| Full Expensing | 100% first-year relief | New and unused main pool plant and machinery | Permanent for companies since 2023 |
| 50% First-Year Allowance | 50% first-year allowance | Special rate pool items | Ongoing |
| New 40% First-Year Allowance | 40% first-year allowance | Main rate plant and machinery (with reduced restrictions) | From 1 January 2026; extends to leasing and unincorporated businesses |
| Writing Down Allowance – Main Pool (WDA) | 18% reducing balance → 14% from April 2026 | General plant and machinery | Reduction effective 1 April 2026 (companies) / 6 April 2026 (unincorporated) |
| Writing Down Allowance – Special Rate Pool | 6% reducing balance | Long-life assets and integral features | Unchanged |
| Structures and Buildings Allowance (SBA) | 3% straight-line | Qualifying structures and buildings | Ongoing |
| Zero-Emission Vehicles / Charging Points | 100% first-year allowance | New zero-emission cars and electric vehicle charge points | Extended until 31 March 2027 (companies) / 5 April 2027 (unincorporated) |
Calculating Capital Allowance: A Practical View
For calculating capital allowances, the starting point is the total qualifying cost. This usually includes the purchase price as well as delivery, installation and fitting cost. The given table demonstrates how different allowance types affect the relief timing.
| Asset Cost | Allowance Applied | First-Year Claim | Ongoing Relief |
| £75,000 equipment | AIA | £75,000 | None |
| £220,000 new machinery | Full Expensing | £220,000 | None |
| £120,000 Plant & Machinery integrated into building | Special Rate Pool | £7,200 | 6% annually |
| £600,000 building works | SBA | £18,000 | 3% annually |
Procedure for Claiming Capital Allowances
Claims are included into the Company Tax Return or Self Assessment tax return. A supporting computation detailing pools, allowances and carried-forward balances must be provided. No separate claim form is required. Eligibility verification and retention of evidence are mandatory. In complex conditions, professional assessment can identify additional qualifying elements, especially involving property refurbishments.
Why Capital Allowances Still Matter
Capital allowances remain a vital component of the UK’s tax framework, which facilitates the efficient capital deployment and delivers substantial tax savings. Understanding it is no longer optional for growing businesses. As Corporation Tax rates remain high, the effective use of allowances can materially improve cash flow and investment capacity. With recent adjustments, businesses are encouraged to review their investment plans and ensure optimal claims.
How Reflex Accounting Can Help
At Reflex Accounting, we take a proactive approach to capital allowances. We do not just calculate figures. We help you understand how your investment decisions affect tax, cash flow and long-term growth. Whether you are purchasing equipment, refurbishing premises or reviewing historic expenditure, our team ensures your capital allowances claim is accurate, compliant and optimised.
Faqs:
What exactly are capital allowances in the UK?
Capital allowances are a tax relief that lets UK businesses deduct the cost of qualifying long-term assets from taxable profits and reduce the amount of tax they pay.
What assets qualify for capital allowances?
Most of the plant and machinery used in the business qualify as equipment, machinery, computers, furniture and certain fixtures within commercial properties.
How do I know if my car qualifies for capital allowances?
Car eligibility depends mainly on CO2 emissions. Low-emission cars qualify for higher relief. While higher-emission cars are more restricted. Vans are usually treated more favourably.
How do I claim capital allowances in my tax return?
Capital allowances must be claimed within your tax return. They are not automatic. They must be calculated and included correctly to reduce taxable profits.
Can I claim capital allowances if I lease or rent equipment?
Generally, you can only claim capital allowances on assets you own. Some finance or hire purchase agreements may qualify, but rental agreements usually do not.
How much tax can I save with capital allowances?
Savings depend on the asset cost and allowance type. In many cases, businesses can claim up to 100% of the cost and deliver significant
