Capital allowances explained: A business owner’s guide for 2025/26

If you’ve ever felt  a bit worried by the term ‘capital allowances’, you’re not alone. Just last week, one of our manufacturing clients in Dartford admitted she’d been putting off buying new machinery because she found the whole concept of capital allowances confusing. Let’s change that today by breaking down everything you need to know about these valuable tax reliefs.

What are capital allowances and why should you care?

Think of capital allowances as the government’s way of saying ‘thanks for investing in your business.’ When you buy assets for your business – whether that’s a new delivery van, office equipment, or manufacturing machinery – capital allowances let you deduct some or all the cost from your profits before you pay tax.

Types of capital allowances you need to know about

Annual Investment Allowance (AIA)

The star of the show is the Annual Investment Allowance. For 2025/26, you can claim up to £1 million in qualifying expenditure. AIA is your VIP access pass to tax savings – it lets you deduct 100% of the cost of qualifying assets from your profits before tax in the year you buy them. That’s right, the full amount!

What qualifies for AIA?

Plant and machinery qualify for AIA and includes:

• Items you use in your business such as business cars, vans, computers, office equipment and integral features of a building such as heating, lighting, lifts, air-conditioning, fitted kitchens, fire alarm & CCTV systems
• Costs of demolishing plant and machinery or alteration costs to install plant and machinery.

What is not eligible for AIA?

• Items used solely for business entertaining purposes such as a karaoke machine or a yacht (yeah, we know, chance would be a fine thing, right?!)
• Land
• Structures such as bridges, roads etc.
• Buildings including doors, gates, shutters, mains water and gas systems.

You may be able to claim the structures and buildings allowance tax relief for these items.

NB You CANNOT claim for items you owned for another reason before you started using them in your business, nor can you claim for items given to you or your business.

Writing Down Allowances (WDA)

For assets that don’t qualify for AIA or when you’ve exceeded your AIA limit, Writing Down Allowances come into play. You must group items into their appropriate pools depending on which rate they qualify for. Writing down allowances work more like a steady drip of tax relief rather than one big splash.

– Main rate pool: 18% per year

– Special rate pool: 6% per year

– Single asset pool: 6% or 18% depending on the item

Items qualify for the main pool rate unless they are:

Special rate pool assets

• Integral features (see definition above)
• Items with a long life (usually >25 years)
• Solar panels
• Thermal insulation you’ve added to a building
• Cars with CO2 emissions over a certain threshold (see below)

Single asset pool

• Assets that have a short life span
• Assets that are also used outside your business if you are a sole trader or in a partnership

Rates for cars

You can claim one of the following:

• the full value of the car as 100% first-year allowances
• 18% of the car’s value (main rate allowances)
• 6% of the car’s value (special rate allowances)

Read more about main and special rate allowances pools.

When you purchased the car and its CO2 emissions determine the rate you can claim. Check your car’s CO2 emissions.

When can you claim allowances?

You must claim your AIA in the period you made the purchase. The date you bought the item is either when you signed the contract if payment is due within 4 months or when payment is due (if more than 4 months later).

Real-world example of how capital allowances work

Let’s say you run a printing business and invest £500,000 in new printing equipment. Under the Annual Investment Allowance, you could potentially deduct the full £500,000 from your profits before paying tax. If you’re paying corporation tax at 25%, that’s a tax saving of £125,000!

Common capital allowances mistakes to avoid

We’ve seen plenty of businesses miss out on valuable tax relief because they

• Don’t keep proper records of their capital expenditure
• Miss the deadline for claiming
• Don’t realise certain assets qualify
• Forget to consider capital allowances when timing major purchases.

Planning your purchases strategically

Timing is everything when it comes to capital allowances. If you’re planning a major purchase, it’s worth thinking about when would be the most tax-efficient time to buy. Sometimes, delaying or bringing forward a purchase by just a few weeks can make a significant difference to your tax bill.

Getting help with capital allowances

While we’ve tried to keep this explanation straightforward, capital allowances can get complex – especially when you’re dealing with larger investments or special cases. That’s why it’s always worth having a chat with your accountant before making major purchases. Get help to:

• Plan the timing of your investments
• Identify all qualifying expenditure
• Structure purchases in the most tax-efficient way
• Ensure you claim everything you’re entitled to.

The world of capital allowances might seem daunting at first, but it’s simply about encouraging businesses to invest and grow. And remember, while tax savings are great, they shouldn’t be the only factor in your investment decisions. The right investments should help your business thrive, with tax relief being the icing on the cake.

Need specific advice about capital allowances for your business? Drop us a line – we love making tax simple! Contact us online or call 01322 250 001 for a free, no-obligation conversation to see if you are claiming all the tax relief you can.

Frequently asked questions

Do sole traders get capital allowances?

Yes, sole traders get the same allowances as limited companies if they are using accrual basis accounting. If you are using cash basis accounting, you can only claim capital allowances on cars. Ask your accountant for more information.

Can landlords claim capital allowances?

Yes, landlords can claim capital allowances. Check out the details on the HMRC website.

What is the difference between capital allowances and depreciation?

Depreciation is an accounting adjustment to recognise the decrease in the value of an asset (movable or fixed assets) over time due to wear and tear and obsolescence. It enables a correct valuation of the business and is non-deductible for tax purposes. Capital allowances are effectively a tax-deductible version of depreciation.

Do capital allowances reduce profit?

Yes, capital allowances reduce your taxable profit by the amount you are eligible to claim, in some case 100% of the asset cost.

Do you include VAT in capital allowances?

If you buy an asset and pay VAT but you can claim the VAT back, you should only claim capital allowances on the cost of the asset net of the VAT input tax. If you cannot reclaim the VAT paid, you can include the VAT in the cost of the capital expenditure for capital allowances purposes.