Capital allowances are one of the most powerful tax reliefs available to UK businesses, and one of the least well understood. Used properly, they can meaningfully reduce your Corporation Tax bill. Used badly (or forgotten entirely), you leave real money on the table.
Here’s how they actually work in 2026, what qualifies, and how to time things properly.
What are capital allowances?
When your business spends money, HMRC generally lets you deduct it from your taxable profit. But there’s a distinction between:
- Revenue expenses — day-to-day costs like rent, salaries, materials. These come off your profit immediately.
- Capital expenses — things bought to use in the business over multiple years, like equipment, vehicles, machinery. These are treated differently.
Capital allowances are the mechanism by which HMRC lets you deduct capital costs from your taxable profit over time. Different types of assets qualify for different rates. That’s what this guide is about.
Recent changes worth knowing
From April 2026, two significant changes came in:
- Writing-down allowance cut from 18% to 14% for main-pool plant and machinery
- New 40% first-year allowance introduced for main-rate assets
The direction of travel is clear. HMRC is trying to reward businesses that invest in the first year they buy something (which stimulates economic activity), while slightly slowing the tax relief for assets held longer.
Important: capital allowance rules and rates change regularly. Verify the current position on GOV.UK or with your accountant before making significant decisions.
The four main allowances explained
1. Annual Investment Allowance (AIA)
The big one for most SMEs. The AIA lets you deduct 100% of the cost of qualifying plant and machinery in the year you buy it, up to a limit of £1 million per year.
For the vast majority of small and medium-sized businesses, this is the main allowance you’ll use. It covers most equipment purchases, tools, machinery, and commercial vehicles, but not cars.
The £1 million limit is per group of connected companies, not per business. Something to be aware of if you run several businesses.
2. First-Year Allowances (FYAs)
On top of (or instead of) the AIA, some categories of asset get their own first-year allowance:
- 40% FYA on main-rate assets (new since April 2026)
- 100% FYA on new zero-emission cars
- 100% FYA on new electric vehicle charge points
- 100% FYA on certain energy-efficient equipment (via the Energy Technology List)
These matter most for businesses that spend beyond the £1m AIA limit, or for specific asset types where the FYA is more valuable than the AIA.
3. Writing-Down Allowances (WDAs)
For anything that doesn’t qualify for AIA or FYA, or where you’ve already used your AIA for the year, the writing-down allowance applies. This gives you tax relief over multiple years at a percentage of the remaining value.
- Main pool: 14% per year (reduced from 18% in April 2026)
- Special rate pool: 6% per year (integral features, long-life assets, thermal insulation)
- Single asset pools: vary by asset (typically for cars over certain emission thresholds)
4. Structures and Buildings Allowance (SBA)
For the construction, renovation, or conversion of commercial buildings. 3% per year on the qualifying cost, straight-line over 33.3 years.
Narrower than AIA but very valuable for businesses undertaking significant property work.
What qualifies as plant and machinery
This is where a lot of businesses lose out, because the definition is broader than most people realise. Qualifying items include:
- Computers, tablets, phones, and other technology
- Office furniture (desks, chairs, filing cabinets)
- Kitchen appliances and equipment
- Tools, machinery, workshop equipment
- Commercial vans and light commercial vehicles
- Alarm systems and security equipment
- Air conditioning and heating systems
- Certain building fixtures (though rules on integral features vary)
What doesn’t qualify: cars (which have their own rules based on emissions), land, buildings themselves (SBA applies separately), and anything for personal use.
The timing question
Here’s where capital allowances stop being just “claim what you spent” and start being genuine tax planning. The date you buy an asset determines which year the allowance applies to.
Practical example: Your year-end is 31 March. You’re planning to buy £40,000 of equipment. Buying in March means the AIA applies to this year’s profit. Buying in April pushes it into next year’s.
Whether that’s a good or bad thing depends on your profit position. If this year is high-profit and next year looks lower, pulling the purchase into this year makes sense. If it’s the reverse, you might deliberately delay.
This is why the conversation with your accountant before a big purchase matters far more than the conversation after.
The most common capital allowance mistakes
- Missing purchases entirely. If your bookkeeping isn’t well categorised, capital items get lost in the general expense pool and never claimed. Review annually with your accountant.
- Buying just after year-end. A purchase on 1 April defers the allowance by a whole year. Sometimes that’s the right call. Sometimes it costs thousands unnecessarily.
- Assuming everything qualifies for AIA. Cars have different rules. Property fixtures have different rules. Getting it wrong means either overclaiming (and eventual HMRC issue) or underclaiming.
- Ignoring the disposal side. When you sell or dispose of an asset, there are balancing charges or allowances that need to be applied. Sometimes selling an old asset triggers a tax bill you weren’t expecting.
- Forgetting integral features. Many building fixtures qualify at the special 6% rate. Missing them, or classifying them wrong, can cost meaningful money over time.
Practical steps for maximising your relief
- Keep a proper capital assets register. Every business should know what it owns and when it bought it.
- Review purchases annually with your accountant. Don’t wait for year-end accounts to be prepared. Have a mid-year review to spot opportunities.
- Consider the timing of major purchases. Especially anything over £10,000. A five-minute conversation before signing can genuinely save thousands.
- Don’t ignore small items. A £400 laptop, a £200 desk, a £1,000 tool. Individually small, collectively significant. All qualify.
- Track work vehicles carefully. Cars have their own rules based on emissions. Vans and other commercial vehicles are more straightforward. Getting the classification right matters.
The bigger picture
Capital allowances aren’t the most exciting bit of tax planning, but they’re one of the most consistent. Every business buying equipment, vehicles, or property fixtures has them. The businesses that do it well are simply the ones who track carefully, time properly, and take the conversation with their accountant seriously before signing big invoices.
It’s the sort of thing that quietly saves a growing business several thousand pounds a year, every year, without anyone noticing. Which is why the ones who ignore it end up paying more Corporation Tax than they need to.
Planning a significant equipment purchase, or want a review of your capital allowance position? Send us a message and we’ll walk through it properly. Better before you buy than after.
