Capital Allowances Example: How UK Businesses Claim Tax Relief on Assets

What Are Capital Allowances?

Capital allowances let you deduct the cost of certain business assets from your taxable profits. Instead of treating the full cost as an expense in one go (which you cannot do for most assets), you claim a percentage of the cost each year. The result is less corporation tax or income tax to pay.

The rules apply to limited companies, sole traders, and partnerships. The types of assets that qualify are broadly called "plant and machinery". That includes computers, office furniture, vans, tools, machinery, and some building fixtures like air conditioning or lifts.

Land, buildings (except certain fixtures), and cars with CO2 emissions above 50g/km have different rules. We will cover those separately.

A Simple Capital Allowances Example

Let us work through a real scenario. A limited company in Manchester's Northern Quarter runs a digital marketing agency. In the 2025/26 tax year, the director buys:

• A new server and networking equipment for £14,720
• Office desks and chairs for £3,850
• A laptop for the new hire at £1,430
• A van for client site visits at £28,500

Total spend: £48,500. All items qualify as plant and machinery.

The company has taxable profits of £92,800 before capital allowances. Corporation tax at 19% (small profits rate) would be £17,632. But the company can claim capital allowances on the full £48,500.

Under the Annual Investment Allowance (AIA), the company can deduct 100% of the cost in the same year, up to a £1,000,000 limit. That means the full £48,500 is deductible. Taxable profits drop to £44,300. Corporation tax becomes £8,417. The company saves £9,215 in tax.

That is the core benefit. You spend on qualifying assets, and the taxman effectively covers 19% to 25% of the cost (depending on your corporation tax rate).

What If You Spend More Than £1,000,000?

The AIA cap is £1,000,000 per year for most businesses. If you spend £1,200,000, the first £1,000,000 gets 100% relief. The remaining £200,000 goes into the main pool at 18% writing down allowance per year. You claim 18% of £200,000 (£36,000) in year one, then 18% of the remaining balance each year.

Most small and growing businesses will not hit the £1,000,000 cap. But if you are a manufacturing or construction company buying heavy machinery, it is worth planning your purchases across two accounting periods if you are close to the limit.

Full Expensing for Limited Companies

From 1 April 2023, limited companies can use Full Expensing on most new plant and machinery. This gives 100% first-year relief, just like AIA, but with no cap. The catch is it only applies to new assets, not second-hand ones. AIA covers both new and used.

In the example above, the server, laptop, and van are new. The company could claim Full Expensing on those items (£44,650) and AIA on the second-hand desks and chairs (£3,850). The tax result is the same: full relief in year one.

Full Expensing is permanent from April 2023. It replaced the temporary Super Deduction which ended on 31 March 2023.

Capital Allowances for Sole Traders and Partnerships

Sole traders and partnerships cannot use Full Expensing. That is limited to companies. But they can use AIA up to £1,000,000 and the 18% or 6% writing down allowances on the main pool and special rate pool.

Take a self-employed electrician in Bristol. He buys a new van for £32,400 and tools for £4,800. Total £37,200. He claims AIA on the full amount. His self-employed profits drop from £63,400 to £26,200. At 20% basic rate tax, he saves £7,440 in income tax and Class 4 NIC.

The same principle applies. Spend on qualifying assets, reduce your tax bill.

What Does Not Qualify for Capital Allowances?

Some common business purchases do not qualify for capital allowances. You need to know these to avoid mistakes on your tax return.

• Land and buildings (except integral fixtures like lifts, air conditioning, and electrical systems)
• Cars with CO2 emissions above 50g/km (these go into a separate pool at 6% or 18% depending on emissions)
• Assets used partly for personal use (only the business proportion qualifies)
• Assets you already owned before starting the business (you can claim on market value if you bring them into the business)
• Structures and buildings (these qualify for Structures and Buildings Allowance at 3% per year, not plant and machinery allowances)

If you buy a car for your limited company, the capital allowances treatment depends on CO2 emissions. A fully electric car (0g/km) qualifies for 100% first-year allowance. A hybrid or petrol car with emissions between 1g/km and 50g/km goes into the main pool at 18%. Anything above 50g/km goes into the special rate pool at 6%.

How to Claim Capital Allowances on Your Tax Return

For limited companies, you claim capital allowances on the corporation tax return (CT600). The computation goes in the supplementary pages. You list the cost of assets, the allowances claimed, and the pool balance carried forward.

For sole traders and partnerships, you claim on the self-employment pages of the self assessment return (SA103). There is a specific section for capital allowances. You enter the total cost of assets acquired in the year and the allowances you are claiming.

Most accounting software handles this automatically. Our team at Holloway Davies prepares the computations as part of your year-end accounts. We make sure you claim everything you are entitled to.

Structures and Buildings Allowance

If you buy or build commercial premises, you cannot claim plant and machinery allowances on the building itself. But you can claim Structures and Buildings Allowance (SBA) at 3% per year on the construction cost. This applies to new builds and some conversions.

SBA is claimed on a straight-line basis over 33.33 years. If you spend £500,000 on a new office build, you claim £15,000 per year for 33 years. It is not as generous as AIA, but it is better than nothing.

The allowance applies to the person who incurs the construction cost. If you buy an existing building, you may be able to claim on the historic cost if the seller has not already claimed it. This is a complex area. Speak to us if you are buying commercial property.

Common Mistakes with Capital Allowances

Three mistakes crop up regularly with clients.

First, not claiming at all. Some business owners think capital allowances are optional or too complicated. They are not optional if you want to pay the right amount of tax. Claim what you are entitled to.

Second, claiming on assets that do not qualify. A client once tried to claim capital allowances on a painting for the office wall. Paintings are not plant and machinery. They are fixed assets but do not qualify for allowances. The cost sits on the balance sheet and reduces any gain on sale, but you cannot deduct it from profits.

Third, forgetting to adjust for private use. If you use a van 70% for business and 30% for personal journeys, you only claim capital allowances on 70% of the cost. HMRC will adjust this on enquiry if you claim the full amount.

Capital Allowances and the Annual Investment Allowance Limit

The AIA limit is £1,000,000 for most businesses. It applies per group of companies under common control. If you have two limited companies with the same directors and shareholders, they share one AIA limit between them. You cannot claim £1,000,000 in each company.

The limit is also time-apportioned if your accounting period is shorter than 12 months. A company starting up with a 9-month first period gets an AIA limit of £750,000 (9/12 of £1,000,000).

If you are close to the limit, plan your asset purchases across two accounting periods to maximise relief.

Writing Down Allowances Explained

If you do not use AIA or Full Expensing on an asset, it goes into a pool. The main pool gets 18% writing down allowance per year on a reducing balance basis. The special rate pool (cars over 50g/km, integral features, long-life assets) gets 6%.

Example: You buy a second-hand machine for £40,000 and do not use AIA (perhaps you have already used your full £1,000,000 limit). The machine goes into the main pool. Year one: 18% of £40,000 = £7,200 allowance. Pool balance carried forward: £32,800. Year two: 18% of £32,800 = £5,904. And so on.

Writing down allowances are not as generous as 100% relief, but they still reduce your tax bill over time.

When to Get Professional Advice

Capital allowances are straightforward for most small businesses. If you buy standard plant and machinery, claim AIA, and move on. But there are edge cases where advice is essential.

Buying commercial property with embedded fixtures. Acquiring a business where assets are transferred. Claiming on integral features in a refurbishment. Using the special rate pool for long-life assets. These situations need a specialist review.

As ICAEW qualified accountants, we handle capital allowances computations for businesses across every sector. Book a consultation if you want to check you are claiming everything correctly.

The worked example above shows the basic mechanics. Your actual position will depend on your specific assets, your tax rate, and whether you are a company or sole trader. But the principle is the same: spend on qualifying assets, claim the relief, reduce your tax.