When a UK business buys machinery, vehicles or equipment, the cost is not deducted from profits like an electricity bill. Capital allowances are the set of rules that spread, or sometimes bring forward, that tax relief, and the choice of allowance can change when a firm pays tax.
Why equipment spending is treated differently from running costs
Day-to-day costs such as wages, rent and stationery are deducted from profit in the period they are incurred. Plant and machinery is different because it keeps being useful for years. Accounting depreciation, the figure in a company’s published accounts, is not accepted for tax purposes. Instead, tax law substitutes capital allowances, which are a set percentage deduction defined by statute and HMRC guidance.
For a growing business this matters for timing as much as for the total. The overall relief may be the same, but claiming it faster brings the cash saving forward. That is directly relevant to why cash flow matters even when revenue is growing.
The main allowances at a glance
According to GOV.UK, a business can deduct the cost of qualifying items from its profits using several different allowances. The most commonly relevant are summarised below.
| Allowance | Who can claim | What it gives |
|---|---|---|
| Annual investment allowance (AIA) | Companies, sole traders and most partnerships | Deduction of the full cost of most plant and machinery, up to £1 million |
| Full expensing | Companies only | 100% deduction for new and unused plant and machinery bought from 1 April 2023, excluding cars |
| 50% first-year allowance | Companies only | 50% deduction in the first year for qualifying new and unused items |
| Writing down allowance | Anyone with qualifying spending not covered above | A percentage of the remaining value deducted each year |
An item can be split across allowances, but GOV.UK is clear that you cannot claim more than one allowance against the same expenditure.
How does the £1 million annual investment allowance work?
GOV.UK states that the AIA is £1 million, a level that has applied since 1 January 2019. It lets a business deduct the full value of most qualifying plant and machinery from profits in the period the item is bought, up to that limit.
Several practical rules shape how it is used:
- Timing: the claim can only be made in the period the item was bought. The purchase date is generally the date the contract is signed if payment falls due within four months, or the payment due date if that is later than four months.
- Short accounting periods: the limit is pro-rated. A nine-month period, for example, gives £750,000.
- Connected companies: companies controlled by the same person get one AIA between them and can choose how to share it.
- Exclusions: the AIA cannot be claimed on business cars, on items previously owned for another reason, or on items given to the business.
- Partnerships: the AIA is not available if any partner is not an individual.
Spending above the limit does not lose relief. The excess can be claimed through first-year allowances or writing down allowances.
What does full expensing add for companies?
Full expensing is open only to companies. According to GOV.UK, it deducts 100% of the cost of qualifying plant and machinery from profits before tax in the year of purchase. The assets must have been bought from 1 April 2023, must be new and unused, and must not be cars. Second-hand equipment is therefore out of scope. The claim is made on the Company Tax Return.
Because the AIA already covers the first £1 million, full expensing matters mainly to larger spending programmes, to companies that have used up a shared AIA, and to cases where a company wants an uncapped first-year deduction. A 50% first-year allowance is also available to companies, and the same rule applies: one allowance per pound of expenditure.
Unincorporated businesses, such as sole traders and ordinary partnerships, cannot use full expensing, so for them the AIA limit and writing down allowances carry more weight.
How do writing down allowances work in practice?
Writing down allowances apply where an item does not qualify for another allowance, or where value remains after the maximum of another allowance has been claimed. Spending is grouped into pools, and each year a percentage of the pool’s remaining balance is deducted. According to GOV.UK, there are three types of pool:
- Main pool: 14% from April 2026, and 18% before. The change took effect on 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. It holds plant and machinery that does not belong in another pool.
- Special rate pool: 6%. It covers integral features such as lifts, heating and hot water systems, air-conditioning and electrical systems including lighting, plus solar panels, thermal insulation added to a building, certain high-emission cars, and long-life items above a threshold.
- Single asset pools: the rate depends on the item.
On the long-life items threshold, GOV.UK says that if the value of such items bought in an accounting period is £100,000 or less, they go in the main pool unless another factor sends them to the special rate pool. Above £100,000, they go in the special rate pool. The limit is also pro-rated for short periods: £75,000 for nine months.
Buildings themselves do not qualify for the 6% rate, although GOV.UK notes that some non-residential building costs may attract a 3% allowance.
Worked example: the same machine, two routes
Illustrative arithmetic can show why timing matters. Suppose a company that pays Corporation Tax at the 25% main rate buys a new machine for £100,000. GOV.UK lists 25% as the main rate for companies with profits above £250,000, so the example assumes profits are above that level. (A company with lower profits pays a different effective rate; the marginal relief rules explain the band in between.)
Route one: full expensing. The whole £100,000 is deducted in year one. Tax saved: £100,000 × 25% = £25,000.
Route two: main pool writing down allowance at 14%.
| Year | Opening balance | Allowance at 14% | Tax saved at 25% |
|---|---|---|---|
| 1 | £100,000.00 | £14,000.00 | £3,500.00 |
| 2 | £86,000.00 | £12,040.00 | £3,010.00 |
| 3 | £73,960.00 | £10,354.40 | £2,588.60 |
After three years the writing down route has delivered £9,098.60 of tax saving, against £25,000 on day one under full expensing. The writing down balance of £63,605.60 would continue to be relieved in later years, so the two routes converge only slowly. The total relief is not the point; the speed is.
When the allowances do not apply the way firms expect
Several common situations catch businesses out:
- Cars. Business cars are excluded from the AIA and from full expensing. GOV.UK says the writing down rate for them depends on their CO2 emissions.
- Second-hand equipment. Full expensing needs new and unused assets, so used equipment falls outside it.
- Equipment leased out. On first-year allowances, GOV.UK says you cannot normally claim on items bought to lease to other people.
- Private use. Sole traders and partners must reduce claims for business items also used privately.
- Closing a business. No AIA is available for items bought in the final accounting period; a balancing charge or allowance applies instead.
How capital allowances fit into investment decisions
Tax relief rarely creates a good investment on its own, and a purchase should still clear the return a business needs. But allowances change after-tax cash flows, and so influence the timing and scale of purchases. This is the same logic described in how companies decide where to invest: the relevant comparison is the after-tax return of each option against the others, and a faster deduction raises the present value of a project even when the headline cost is unchanged.
The lower 14% main pool rate from April 2026 also changes the arithmetic for spending that cannot use the AIA or full expensing: relief on that spending now arrives more slowly than it did at 18%.
Conclusion: the allowance sets the pace of tax relief
Capital allowances decide how quickly a firm recovers tax on the equipment it buys. For most smaller purchases the £1 million AIA gives a full deduction in year one; companies can go further with full expensing on new, unused plant and machinery; and everything else falls into pools relieved at 14% or 6% a year. Which route applies depends on the type of business, the type of asset and the date of purchase, so the detail of the official guidance matters.
This article provides general information, not personalised financial or tax advice. Tax rules, rates and thresholds change, so check current official guidance before making decisions.
Sources: GOV.UK
