Capital Allowances Demystified: How UK Businesses Can Claim Deductions on Assets

Capital allowances help UK businesses lower their tax bills by allowing them to deduct costs for qualifying assets. These tax reliefs, set by UK tax law, can boost cash flow and help businesses reinvest. However, many people misunderstand or overlook these rules, resulting in missed opportunities for valuable relief.

Understanding Capital Allowances

Capital allowances allow businesses to deduct the cost of certain capital assets from their taxable profits. These include tangible assets used in the course of business operations, such as:

• Plant and machinery
• Office equipment and furniture
• Commercial vehicles
• Fixtures and fittings
• Qualifying buildings and structures
• Research and development-related infrastructure

Unlike depreciation used in financial accounting, capital allowances are determined by tax rules and provide a more immediate or structured route to tax relief.

Main Types of Capital Allowances in 2025/26

Annual Investment Allowance (AIA)

The AIA is the most widely used capital allowance. It allows businesses to deduct 100 per cent of qualifying expenditure on plant and machinery, up to a maximum of £1 million per year. This allowance is available to all business types, including sole traders, partnerships, and companies.

AIA is typically applied first because of its generous scope and immediate tax-saving potential. It covers a wide range of assets but excludes cars and structures.

Full Expensing

Full expensing lets companies deduct the entire cost of new and unused main-rate assets in the same year they spend the money. It started as a temporary measure but is now a permanent option. This tax relief encourages companies to invest in equipment by allowing them to take the full deduction right away.

Only companies can use this relief. It covers items like production equipment, tools, and IT systems. However, it does not include second-hand items or leased equipment.

50 Per cent First-Year Allowance (FYA)

Where assets do not qualify for full expensing, such as special-rate items like integral building features or long-life assets, a 50 per cent FYA can be claimed in the first year. The remaining balance enters a capital allowance pool and is written down annually through writing down allowances.

This first-year boost helps businesses bring forward some of the tax relief that would otherwise be spread over many years.

Writing Down Allowances (WDAs)

For expenditure not covered by AIA, full expensing, or FYA, businesses can claim writing-down allowances annually.

• Main-rate assets are written down at 18 per cent per year.
• Special-rate assets (e.g., heating systems, long-life assets) are written down at 6 per cent.

This relief is used to reduce the tax value of assets over time gradually.

Structures and Buildings Allowance (SBA)

The SBA allows a flat-rate deduction of 3 per cent per year over 33 years for eligible construction or renovation costs on non-residential buildings. This includes commercial properties and offices, but not dwellings.

While not as fast as AIA or full expensing, the SBA provides long-term relief and encourages investment in commercial infrastructure.

Research and Development Allowances (RDAs)

For businesses investing in innovation, RDAs allow a full 100 per cent deduction in the year of expenditure for capital assets used in R&D. This can include laboratory equipment, testing facilities, and computers used in qualifying research activities.

This allowance supports businesses undertaking scientific or technological development and complements R&D tax credits.

Key 2025 HMRC Updates on Capital Allowances

Recent updates for the 2025/26 tax year have clarified some important areas:

1. Definition of New and Unused Assets: Only assets that are completely new and not previously used or second-hand qualify for full expensing or the 50 per cent FYA. Refurbished or upgraded assets generally do not qualify under these schemes.
2. Component-Based Assets: If an asset is assembled from new parts, it may still qualify as a new asset. However, combining new and reused components may disqualify the entire item from full expensing. Each situation must be assessed based on substance over form.
3. Disposal Rules: When assets are sold or disposed of after being claimed under full expensing or FYA, a balancing charge may arise. This means part or all of the proceeds must be added back into taxable income. Careful planning is necessary to manage these tax implications.

Benefits of Capital Allowances

Immediate Tax Relief: Capital allowances provide immediate deductions for qualifying purchases, which can significantly reduce a company’s taxable profits. In turn, this leads to lower corporation or income tax bills.

Improved Cash Flow: By accelerating tax relief, businesses retain more of their earnings. This improved cash flow can be reinvested in expansion, innovation, or day-to-day operations.

Strategic Tax Planning: Different allowances allow flexibility. Businesses can spread deductions across years or claim full relief upfront, depending on their financial needs and profitability.

Common Mistakes to Avoid: Failing to understand or correctly apply capital allowances can lead to missed opportunities or compliance issues. Common errors include:

• Misclassifying plant and machinery as building structures
• Overlooking the business-use percentage of assets with dual use (e.g., vehicles)
• Claiming on leased or hired assets which are not eligible
• Ignoring the impact of selling or disposing of assets early
• Not maintaining proper records to support claims.

Good tax planning involves correctly categorising assets, applying the right allowances, and maintaining clear records.

Step-by-Step Guide to Claiming Capital Allowances

1. Identify Qualifying Expenditure: Review all purchases of capital assets during the financial year. Focus on items used in the business over the long term, rather than consumables or routine expenses.
2. Categorise Assets Properly: Determine whether each asset falls under plant and machinery, special-rate pool, structures and buildings, or R&D-related assets.
3. Select the Most Beneficial Relief: Apply AIA first if available. Use full expensing or 50% FYA for eligible new assets. Allocate the rest to writing down allowances or SBA as appropriate.
4. Adjust for Private Use: For sole traders and partnerships, ensure that only the business-use portion of the asset is claimed. Personal use must be excluded.
5. File with Your Tax Return: Claims should be included in the appropriate section of your Corporation Tax or Self-Assessment tax return. Accurate records should be retained in case of an HMRC review.

When to Seek Expert Advice

Capital allowance claims can vary in complexity, especially for property purchases, refurbishments, or mixed-use assets. Seeking professional advice from a tax adviser or accountant experienced in capital allowances can help identify missed opportunities and prevent costly mistakes. Capital allowances enable businesses to reduce tax liabilities while supporting growth through investments in equipment, premises, and technology. Staying updated with HMRC guidance and employing the right strategies can significantly impact finances. Regularly reviewing capital expenditures and collaborating with professionals ensures all available benefits are claimed. Leveraging capital allowances is not only about compliance; it’s a savvy financial strategy.