Capital Allowances for Sole Traders: How to Claim and What Has Changed in 2026

Yes, sole traders can claim capital allowances on qualifying plant and machinery, equipment, tools and vehicles used in the business. The Annual Investment Allowance gives 100% relief on up to £1,000,000 of qualifying spend in the year of purchase. Finance Act 2026 (Royal Assent 18 March 2026) brought two material changes: the main-pool writing down allowance fell from 18% to 14% from 6 April 2026, and a new 40% first-year allowance on new, unused main-rate assets applies from 6 April 2026, available to sole traders as well as companies.

This guide covers the full picture for the 2025/26 and 2026/27 tax years, with worked examples and the car rules set out separately.

What Capital Allowances Are and Why They Matter

Sole traders cannot deduct the depreciation they charge in their accounts when computing taxable profit. Depreciation is a book entry; HMRC disallows it. Capital allowances are the tax equivalent: a statutory deduction set by the Capital Allowances Act 2001 (CAA 2001) that replaces depreciation for tax purposes, reducing your taxable profit and therefore your income tax and Class 4 National Insurance.

The mechanics are straightforward. When you buy a qualifying asset, you add it to a capital allowances pool. You then claim a percentage of the pool as a deduction each year. The Annual Investment Allowance accelerates that to 100% in year one for most assets, within a £1,000,000 annual cap. For most self-employed people with ordinary capital spend on tools, computers, vans and equipment, the AIA covers everything. The writing down allowance (WDA) matters when you exceed the AIA limit, buy a car, or carry forward a pool from a prior year.

What Assets Qualify for Capital Allowances

Most physical assets you buy and use for the business qualify:

• Plant and machinery: computers, tablets, phones, cameras, tools, machinery, commercial vehicles, vans, lorries, tractors
• Office furniture, shelving, display units
• Business fixtures and equipment: kitchen equipment in a catering business, salon chairs, workshop presses
• Integral features: heating, ventilation, air conditioning, electrical systems, hot and cold water systems, lighting (these go into the special-rate pool, not the main pool)
• Building improvements that are not part of the fabric: solar panels, CCTV and security systems
• Cars used for business, subject to separate CO2-based rules (see below)

Assets you owned personally before starting your business also qualify, but you claim on market value at the date you first used the asset for business rather than the original purchase price.

What Does Not Qualify

• Land (no capital allowances, ever)
• The fabric of a building: walls, floors, roofs, doors, stairs, windows. The Structures and Buildings Allowance (SBA) covers qualifying construction at 3% per year, but that is a different relief and applies only to new construction or renovation of non-residential premises
• Assets bought exclusively for personal use
• Stock, materials and consumables (these are revenue expenses deducted from profit directly)

The Annual Investment Allowance: 100% Relief Up to £1,000,000

The AIA, set by CAA 2001 ss.38A and 51A, gives 100% relief on qualifying plant and machinery in the year of purchase, up to £1,000,000 per 12-month accounting period. The £1,000,000 limit has been permanent since 1 January 2019. It applies to companies, sole traders and partnerships.

Cars are excluded from the AIA entirely. Everything else the typical sole trader buys (tools, computers, vans, machinery) qualifies. If your total annual capital spend across all qualifying assets is below £1,000,000, you claim 100% of the cost in the year of purchase and the pool for those assets is nil at year end.

Worked Example: Freelance Photographer, 2025/26

A freelance photographer based in Bristol has taxable trading income of £62,000 before capital allowances for 2025/26. During the year she buys:

• Camera body: £3,400
• Telephoto lens: £1,800
• Laptop: £1,200
• External hard drives and storage: £400

Total qualifying spend: £6,800. All four items are plant and machinery; none is a car. She claims the full £6,800 under the AIA.

Taxable profit after AIA: £62,000 minus £6,800 = £55,200.

The reduction in income tax: her pre-AIA profit of £62,000 exceeds the basic-rate ceiling of £50,270, so the entire £6,800 AIA deduction reduces profit in the 40% higher-rate band. IT saving: £6,800 at 40% = £2,720. The reduction in Class 4 NIC: because the pre-AIA profit (£62,000) is above the upper profits limit of £50,270, the marginal Class 4 rate on this deduction is 2% (not 6%). NIC saving: £6,800 at 2% = £136. Total tax and NIC saving: £2,856. That is a real cash saving from buying equipment she needed for her work anyway.

The New 40% First-Year Allowance from April 2026

Finance Act 2026 s.29 (Royal Assent 18 March 2026) inserted CAA 2001 ss.45U and 45V to create a 40% first-year allowance on new, unused main-rate plant and machinery incurred on or after 6 April 2026. Unlike full expensing (which is available to companies only), the 40% FYA is available to sole traders and partnerships as well.

How it works: 40% of the cost is deducted in year one, and the remaining 60% goes into the main pool to be written down at 14% per year thereafter. The asset must be new and unused (not second-hand), and must not fall into the special-rate pool. Cars are excluded.

In practice, most sole traders will use the AIA in preference to the 40% FYA, because the AIA gives 100% relief immediately. The 40% FYA becomes relevant if your annual capital spend exceeds the AIA limit of £1,000,000, or if there is an advantage to spreading the deduction (for example, if you have low profits this year but expect higher profits next year).

Writing Down Allowances: the Rates and the FA 2026 Change

Writing down allowances apply to pool balances not covered by the AIA, and to cars (which are always in a WDA pool). The WDA is a reducing-balance deduction: each year you claim a percentage of the opening pool balance.

There are two pools:

Pool	WDA rate to 5 April 2026	WDA rate from 6 April 2026	Authority	What goes in
Main pool	18%	14% (reduced by FA 2026 s.28)	CAA 2001 s.56	Most plant and machinery, vans, computers, low-emission cars (1 to 50 g/km)
Special-rate pool	6%	6% (unchanged)	CAA 2001 ss.104A to 104D	Integral features, long-life assets, cars with CO2 above 50 g/km

The rate cut from 18% to 14% was enacted by Finance Act 2026 s.28, which amended CAA 2001 s.56. For income tax (sole traders and partnerships), the new rate applies to chargeable periods beginning on or after 6 April 2026. If your accounting period straddles that date, a blended hybrid rate applies, calculated using the apportionment formula in FA 2026 s.28(4).

Worked Example: WDA on a Van, 2026/27

A plumber in Leeds bought a van for £24,000 in January 2025. He claimed AIA on the full cost in 2024/25, so the pool balance on that van is nil. In the 2025/26 tax year he buys a second van (a used diesel) for £14,000. He claims AIA on the full £14,000 in 2025/26, reducing taxable profit by £14,000.

Now consider a different plumber who bought plant and machinery for £1,100,000 in 2025/26. The AIA covers the first £1,000,000. The remaining £100,000 goes into the main pool. His 2025/26 WDA on the £100,000 pool is 18% = £18,000, leaving a closing pool of £82,000. In 2026/27, the WDA rate drops to 14%, so the WDA on £82,000 is £11,480, leaving a closing pool of £70,520. He claims £11,480, not £14,760 that 18% would have produced. The FA 2026 rate cut is worth tracking for any sole trader carrying a material pool balance.

Capital Allowances on Cars: a Separate Regime

Cars are excluded from the AIA and from the 40% FYA. Relief is by WDA only, and the rate depends on the car's CO2 emissions. If you use the car partly for personal journeys, only the business-use proportion of the WDA is claimable. Cars with any private use must be kept in a single-asset pool, not the general main pool.

CO2 emissions	Pool	WDA rate (from 6 April 2026)	Notes
Zero (0 g/km), new car	Not pooled	100% first-year allowance	Full cost deducted in year one; new car only
1 to 50 g/km	Main pool	14% (18% to 5 April 2026)	No AIA; WDA on reducing balance
Above 50 g/km	Special-rate pool	6%	No AIA; slower relief

Private Use Adjustment

If you use a car 60% for business and 40% privately, you claim 60% of the WDA. Keep a mileage log to support the proportion. The log does not need to be exhaustive for every journey, but it must be sufficient to demonstrate the business percentage if HMRC asks.

Mileage Rate: the Alternative to Capital Allowances on Cars

Instead of claiming capital allowances and actual running costs on a car, you can use the approved mileage allowance payment (AMAP) rate. For 2026/27 the rate is 55p per mile for the first 10,000 business miles, then 25p (the first-10,000-miles rate rose from 45p to 55p from 6 April 2026, per HMRC's AMAP guidance). The AMAP rate covers depreciation, insurance, fuel and servicing. If you use the mileage rate for a vehicle, you cannot also claim capital allowances on that vehicle. Pick one method and apply it consistently for as long as you own the vehicle.

Capital Allowances Under the Cash Basis

If you use the cash basis for your Self Assessment return, you do not use the capital allowances system at all. Instead, you deduct the full cost of qualifying assets as a business expense in the year you pay for them. The tax result is the same as claiming 100% AIA, but without maintaining pools or tracking WDA schedules.

When you sell an asset, bring the proceeds into income as a business receipt in the year you receive payment.

For cars under the cash basis, the rule is different: you cannot deduct the purchase cost outright. You either claim actual vehicle costs apportioned for private use (including a depreciation charge calculated as original cost minus estimated residual value over the period of business use), or you use the mileage rate. Most cash-basis sole traders use the mileage rate for cars to avoid the complexity.

The cash basis is now the default method for most sole traders and partnerships. If your accounting is on the accruals basis, the full capital allowances system (AIA, FYA, WDA, pools) applies. For guidance on which method suits your business, see our article on cash basis vs accruals for sole traders.

Disposals, Balancing Charges and Balancing Allowances

When you sell a pooled asset, you deduct the sale proceeds from the pool balance. If the pool goes negative (proceeds exceed the remaining pool), you have a balancing charge: a taxable amount added back to profit. If the pool has a positive residual when you cease trading entirely, you claim that residual as a balancing allowance in the final year.

For a single-asset pool (which is how cars with private use are treated), a disposal triggers a balancing calculation in the year of disposal. If the sale proceeds are below the pool balance, you claim the difference as a balancing allowance. If proceeds exceed the pool balance, you pay tax on the balancing charge.

Sole trader disposal capital allowances therefore require tracking the pool balance of every car and any other single-asset pools throughout ownership.

Common Errors on Self Assessment Returns

• Claiming capital allowances on an asset already fully deducted as a revenue expense (double-counting)
• Claiming AIA on a car (cars are excluded; use WDA)
• Claiming the full WDA on a car used partly privately without applying the business-use restriction
• Using the mileage rate and also claiming capital allowances on the same vehicle
• Missing the AIA entirely on assets that qualify, then carrying them into a pool unnecessarily
• Forgetting to bring sale proceeds into account when disposing of an asset from a pool
• Using the 18% main-pool WDA rate for periods after 6 April 2026 (it is 14% from that date)

When to Ask an Accountant

Capital allowances are straightforward when your spend is modest and well below the AIA limit. They become more complex in four situations: buying a high-value car, disposing of assets mid-year, mixing business and private use across multiple assets, and incorporating (where a joint CAA 2001 s.266 election is needed to transfer pools to the company at tax written-down value without triggering a balancing charge).

If you are considering incorporation and have significant plant and machinery, the capital allowance election and the overall tax modelling (incorporating relief under TCGA 1992 s.162, VAT transfer of a going concern rules) need to be done together. Our guide on switching from sole trader to limited company covers the full process.

For a broader view of what you can deduct in running your business, read our allowable expenses for sole traders checklist. Capital allowances sit alongside revenue expenses, and understanding the boundary between the two saves repeated errors on Self Assessment returns.

If you run a high-capital business and want to model whether the AIA or the 40% FYA optimises your position in a given year, our Self Assessment guide for sole traders with multiple trades covers the interaction between allowances across different trade sources.