Capital allowances allow UK small businesses to deduct the cost of qualifying equipment, machinery, and commercial vehicles from their taxable profits before paying tax. Because HMRC does not allow commercial accounting depreciation as a tax deduction, capital allowances are the legal mechanism to write off business assets.
For most small companies and sole traders, the Annual Investment Allowance (AIA) provides 100% first-year tax relief on up to £1,000,000 of qualifying expenditure. This guide explains which assets qualify, how allowances differ between sole traders and limited companies, and how to claim them correctly.
What Qualifies as Plant and Machinery?
To claim capital allowances, an item must be an asset you keep and use in your business, known under tax law as “plant and machinery”. Day-to-day stock bought for resale does not qualify; stock is treated as a cost of goods sold.
Qualifying plant and machinery includes:
- Office and IT equipment: Laptops, desktop computers, servers, printers, phone systems, and office furniture.
- Operational equipment: Tools, workshop machinery, manufacturing units, warehouse shelving, and packaging systems.
- Commercial transport: Delivery vans, lorries, forklifts, and specialist work vehicles.
- Integral features in commercial premises: Electrical installations, lighting systems, heating, ventilation, air conditioning, and water systems.
Items that do not qualify include buildings, land, structures such as bridges or roads, and ordinary leased assets where you do not own the equipment.
The Main Types of Capital Allowances
UK tax legislation provides different allowances depending on the asset type and business legal structure.
| Allowance Type | Relief Rate | Annual Cap | Eligible Entities |
|---|---|---|---|
| Annual Investment Allowance (AIA) | 100% in Year 1 | £1,000,000 | Sole traders, partnerships, limited companies |
| Full Expensing | 100% in Year 1 | Unlimited | Limited companies only (new/unused main pool) |
| 50% First-Year Allowance (FYA) | 50% in Year 1 | Unlimited | Limited companies only (special rate assets) |
| Writing Down Allowance (Main Rate) | 18% per year | Pool balance | All business structures |
| Writing Down Allowance (Special Rate) | 6% per year | Pool balance | All business structures |
1. Annual Investment Allowance (AIA)
The AIA is the primary relief for UK small businesses. It lets you write off 100% of the cost of qualifying assets against profits in the tax year of purchase, up to a permanent cap of £1,000,000.
If your limited company earns £120,000 in taxable trading profit and buys £30,000 of servers and machinery, you deduct the full £30,000. Your taxable profit falls to £90,000, reducing your Corporation Tax bill immediately. See our breakdown of UK Corporation Tax rates and thresholds to calculate your exact cash savings.
2. Full Expensing (Limited Companies Only)
Full expensing is a permanent tax relief introduced for incorporated businesses. It offers uncapped 100% first-year relief on new, unused plant and machinery that would normally fall into the 18% main rate pool.
Unlike the AIA, full expensing cannot be used for second-hand items or leased equipment. However, because the AIA already covers £1,000,000 of purchases (including second-hand equipment), most small businesses rely on the AIA first.
3. Writing Down Allowances (WDAs)
If asset purchases exceed the £1,000,000 AIA limit, or if an asset is excluded from AIA (such as everyday business cars), you claim Writing Down Allowances over multiple years using declining balance pools:
- Main Rate Pool (18%): Applies to standard machinery, office equipment, and vans not covered by AIA. You deduct 18% of the remaining pool balance each year.
- Special Rate Pool (6%): Applies to integral features in commercial property, solar panels, thermal insulation, and long-life assets (useful life of 25 years or more).
Special Rules for Business Cars
Cars do not qualify for the Annual Investment Allowance. Instead, relief depends entirely on CO2 emissions measured under official test standards:
- New electric cars (0g/km CO2): Qualify for 100% First-Year Allowance. You deduct the full purchase price against profits in year one.
- Low emission cars (1g/km to 50g/km CO2): Allocated to the 18% main rate pool.
- Cars over 50g/km CO2 and second-hand cars: Allocated to the 6% special rate pool.
If you are a sole trader and use the car partly for private travel, you must reduce the capital allowance claim in proportion to your personal use.
What Happens When You Sell an Asset? (Balancing Charges)
When you sell or scrap an asset on which you claimed capital allowances, you must account for the proceeds on your tax return. If the sale proceeds exceed the remaining balance in your capital allowances pool, the difference is added back to your taxable profit as a balancing charge.
For example, if you claimed 100% AIA on a van (reducing pool value to £0) and sell it two years later for £8,000, you pay tax on the £8,000 recoupment. When divesting company equipment, review the rules for Capital Gains Tax on business assets to handle relief claims properly.
How to Claim Capital Allowances
You claim capital allowances directly through your annual tax return:
- Sole traders: Complete the capital allowances section on the Self Assessment form SA103 (Self-employment pages).
- Limited companies: Complete the capital allowances schedule on the Company Tax Return (form CT600).
Maintain an accurate asset register showing purchase dates, supplier invoices, serial numbers, and disposal proceeds. Using dependable cloud accounting software ensures digital receipts and purchase logs satisfy HMRC audit requirements.
Conclusion
Capital allowances are among the most effective tax reliefs available to UK small businesses. By planning major equipment investments and commercial vehicle upgrades around the £1,000,000 Annual Investment Allowance, you can write off costs in year one and significantly lower your annual tax bill.
