What Are Capital Allowances? A UK Business Guide

You've bought a van, a laptop, or a piece of machinery for your business, and now you want to know how to get tax relief on it. That's what capital allowances are for.

Capital allowances let you deduct the cost of qualifying business assets from your taxable profits, which cuts your Corporation Tax or Income Tax bill. The catch is that the rules decide how much you can claim and when, not your accounts.

This guide explains what capital allowances are, which assets qualify, the rates for 2025/26 (plus the changes coming in April 2026), and how to make a claim. It's written for sole traders, partnerships, and limited companies.

What are capital allowances in simple terms?

Capital allowances are a form of tax relief you can claim when you buy long-term assets for your business. These are things you'll keep and use for more than a year, like equipment, computers, or commercial vehicles.

When you claim, you deduct some or all of the asset's cost from your taxable profits. Lower taxable profits mean a lower tax bill.

Capital allowances do two jobs. They give you relief for the wear and tear on your assets over time, and they make investing in productive kit more affordable by handing back some of the cost as tax savings.

How much you can claim depends on what you bought, when you bought it, and which allowance applies. Some allowances let you write off the full cost in year one. Others spread the relief over several years.

Capital allowances vs depreciation: what's the difference?

People mix these up all the time, because both deal with assets losing value. They're not the same thing, and they don't go in the same place.

Depreciation is an accounting concept. It spreads an asset's cost across its useful life in your accounts, using a method you choose under accounting standards. A £10,000 computer system depreciated over five years on a straight-line basis shows £2,000 as an expense each year.

Capital allowances are a tax concept set by HMRC's rules, not by you. The rates and methods are fixed in tax law. Using that same £10,000 system, you might claim 100% of the cost in year one through the Annual Investment Allowance, even though your accounts only show £2,000 of depreciation.

Here's the key point: HMRC doesn't let you deduct depreciation from your taxable profits. So when you do your tax return, you add the depreciation back and claim capital allowances instead. That's why your taxable profit and your accounting profit rarely match.

Which assets can I claim capital allowances on?

Not everything qualifies, so it pays to check before a big purchase.

The golden rule: you can only claim on assets you own and use in your business. That rules out leased or hired items, which stay the property of the leasing company. (You claim the lease payments as a running cost instead.)

Assets that typically qualify, which HMRC groups together as "plant and machinery", include:

• Machinery and industrial equipment
• Computers, laptops, tablets, and servers
• Office furniture and equipment (desks, chairs, photocopiers)
• Tools and trade-specific equipment
• Vans, lorries, and trucks
• Shop fittings and kitchen equipment
• Integral features of a building (electrics, heating, air conditioning, lifts, water systems)
• The cost of altering a building to install qualifying equipment

What doesn't qualify:

• Land
• Buildings and structures themselves (walls, doors, gates, bridges, roads)
• Assets used only for business entertainment, such as a yacht
• Anything you lease or hire rather than own

Some items sit in a grey area. You can't claim on the building itself, but you can claim on integral features like the electrical or heating system. If you're planning a major purchase, it's worth a quick check with an accountant so you don't miss relief or make an incorrect claim. Zmartly's Corporation Tax services include getting your capital allowances right.

What types of capital allowance are available?

There are several, each with its own rules. Picking the right one affects how much relief you get and when.

Annual Investment Allowance (AIA)

The AIA is the workhorse for most businesses. You can claim 100% relief on qualifying plant and machinery up to £1,000,000 a year, so you deduct the full cost in the year you buy it. It covers most equipment but not cars, and it's open to sole traders, partnerships, and limited companies. (Source: gov.uk.)

First Year Allowances (FYA)

First Year Allowances give 100% relief on specific assets the government wants to encourage, including:

• New zero-emission (electric) cars
• Zero-emission goods vehicles
• Equipment on HMRC's energy-saving technology list
• Electric vehicle charge-points

The 100% FYA for zero-emission cars and charge-points runs until 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax, following the extension in Finance Bill 2025-26. (Source: gov.uk.)

Full expensing (companies only)

Full expensing lets companies within the charge to Corporation Tax claim 100% relief in year one on qualifying main-pool plant and machinery, with no upper limit, plus a 50% first-year allowance on special-rate assets. It's permanent and applies from 1 April 2023. Sole traders and partnerships can't use it. (Source: gov.uk.)

The 40% First Year Allowance (from 1 January 2026)

A new 40% First Year Allowance applies to main-rate plant and machinery where the expenditure is incurred on or after 1 January 2026. It's aimed at investment that can't use full expensing, such as spending by unincorporated businesses (sole traders and partnerships) and assets bought for leasing. It's available to both Income Tax and Corporation Tax payers. (Source: gov.uk.)

Writing Down Allowance (WDA)

If you can't claim the full cost through the AIA or an FYA, you use the Writing Down Allowance. It gives relief on a percentage of the asset's value each year on a reducing-balance basis:

• Main pool: 18% a year for 2025/26
• Special rate pool: 6% a year (integral features, long-life assets, thermal insulation)

The main-pool WDA rate falls from 18% to 14% for expenditure incurred on or after 1 April 2026 (Budget 2025). The special-rate pool stays at 6%. (Source: gov.uk.)

Structures and Buildings Allowance (SBA)

You can't normally claim on a building, but the SBA gives 3% a year on the construction cost of new non-residential buildings, on a straight-line basis. More on this below.

How do I work out an asset's value?

It isn't just the sticker price. You include all the costs of getting the asset ready to use:

• The purchase price
• Delivery and installation
• Professional fees tied to the purchase
• The cost of alterations to accommodate the asset
• Testing and commissioning
• Non-recoverable VAT (if you can't reclaim it)

Illustrative example. A manufacturing business buys a lathe:

• Base cost: £300,000
• Delivery and installation: £15,000
• Programming and setup: £10,000
• Building alterations: £25,000
• Total qualifying value: £350,000

You'd base your claim on £350,000, not the £300,000 list price.

Routine servicing and repairs are running costs, claimed in your profit and loss account, not added to the asset's value. If you buy a second-hand asset, you can still claim based on what you paid, although you can't claim allowances the previous owner already claimed.

How do capital allowances work in practice?

Two illustrative examples, one for a company and one for a sole trader. The figures use 2025/26 rates from gov.uk.

Illustrative example 1: a limited company

A company makes £200,000 profit in 2025/26. In June 2025 it buys:

• Manufacturing machinery: £80,000
• Office computers and furniture: £15,000
• A van (a goods vehicle, not a car): £25,000

The machinery, computers, and furniture qualify for the AIA at 100%: £80,000 + £15,000 = £95,000, well under the £1,000,000 limit.

The van is a goods vehicle, so it also qualifies for the AIA at 100%: £25,000.

Total capital allowances: £95,000 + £25,000 = £120,000.

• Profit before allowances: £200,000
• Less capital allowances: £120,000
• Taxable profit: £80,000

The taxable profit sits between £50,000 and £250,000, so Corporation Tax is charged at the 25% main rate with marginal relief:

• 25% of £80,000 = £20,000
• Marginal relief: (£250,000 - £80,000) x 3/200 = £170,000 x 0.015 = £2,550
• Corporation Tax due: £20,000 - £2,550 = £17,450

Claiming the full £120,000 in year one means the company holds no written-down value to carry forward on these assets. In year two it has already had 100% relief, so there's nothing further to claim on them unless it buys more.

Illustrative example 2: a sole trader

A self-employed designer makes £60,000 profit in 2025/26 and buys:

• A computer and software: £8,000
• Office furniture: £4,000
• A car (60g/km CO2, used 80% for business): £18,000

The computer, software, and furniture qualify for the AIA: £8,000 + £4,000 = £12,000 at 100%.

The car can't use the AIA. With CO2 emissions over 50g/km it goes in the special rate pool at 6%, and the claim is reduced for private use:

• £18,000 x 6% = £1,080
• Business use only (80%): £1,080 x 80% = £864

Total capital allowances: £12,000 + £864 = £12,864.

• Profit before allowances: £60,000
• Less capital allowances: £12,864
• Taxable profit: £47,136

That reduces the designer's Income Tax and Class 4 National Insurance bill. You can model the effect on your own numbers with our self-employed tax calculator.

How do capital allowances work for cars?

Cars are treated differently from other assets, and the rules trip people up.

HMRC treats a vehicle as a car if it's suitable for private use, most people would use it privately, and it wasn't built mainly for carrying goods. Cars can't use the AIA or full expensing.

From 1 April 2025 (Corporation Tax) and 6 April 2025 (Income Tax), most double-cab pick-ups with a payload of one tonne or more are treated as cars for capital allowances, so they no longer qualify for the AIA or full expensing. (Source: gov.uk.)

Vans, lorries, and single-cab pick-ups built mainly for goods are not cars, so they can use the AIA.

How cars are treated depends on CO2 emissions:

If you're a sole trader and use a car partly for private journeys, you reduce the claim by the private-use proportion, as in the example above. For a company where a director or employee uses the car privately, there's no allowance restriction, but a benefit-in-kind charge applies instead.

What are the rates for 2025/26 and beyond?

A summary of the main rates and thresholds, all from gov.uk.

For context, Corporation Tax for FY2025 and FY2026 is 19% on profits up to £50,000, 25% on profits over £250,000, and the 25% main rate with marginal relief in between. (Source: gov.uk.)

What happens when I sell an asset?

Selling, scrapping, or giving away an asset is a "disposal", and it triggers a final adjustment. You compare two figures: the asset's written-down value (its tax value after allowances) and the disposal proceeds (what you sold it for, or market value if you gave it away).

If proceeds are below the written-down value, you get a balancing allowance, which is extra relief. If proceeds are above it, you get a balancing charge, which adds to your taxable profit.

Most assets sit in a pool, so on a disposal you simply reduce the pool value by the proceeds. You only get a balancing allowance or charge when you close a pool or deal with a single-asset pool.

Watch out for assets where you claimed 100% upfront through the AIA or an FYA. Their written-down value is zero, so any sale proceeds create a balancing charge, adding to your taxable profit in the year of sale. It's worth thinking about your plans before claiming the maximum relief on something you intend to sell on for a good price.

How does the Structures and Buildings Allowance work?

You generally can't claim capital allowances on a building, but the Structures and Buildings Allowance (SBA) gives relief on the construction cost of new non-residential buildings.

The SBA gives 3% a year on qualifying construction costs on a straight-line basis, so the relief runs for 33 and a third years. Construction contracts must have been signed on or after 29 October 2018, and the building must be in non-residential use. (Source: gov.uk.)

Illustrative example. A business builds a warehouse, completed in June 2025, at a construction cost of £500,000 (land is excluded). The SBA is £500,000 x 3% = £15,000 a year, claimable for 33 and a third years.

If you sell the property, the relief transfers to the new owner, who continues claiming, as long as you provide the right documentation about the qualifying expenditure.

The building structure itself uses the SBA, but integral features inside it, such as electrical systems, heating, lifts, and water systems, are plant and machinery. They go in the special rate pool at 6%, or may qualify for the AIA.

What if I can't use all my allowances in one year?

You don't lose unused allowances. If claiming them turns your profit into a loss, you carry the loss forward and set it against future profits.

Illustrative example. A business makes £5,000 profit in 2025/26 and buys a truck for £100,000, claimed in full through the AIA:

• Profit before allowances: £5,000
• Capital allowances: £100,000
• Trading loss: £95,000

That £95,000 loss carries forward to reduce tax in profitable years. Trading losses carried forward have no time limit and are set against future profits, subject to the usual rules. Companies may have other options, such as setting losses against other income, within the relevant restrictions.

This is helpful for newer businesses that need to invest in kit before they're consistently profitable. You can buy what you need when you need it and still get the full benefit later.

How do I claim capital allowances?

Once the maths is done, the claim itself is straightforward.

Limited companies claim through the Company Tax Return (CT600), completing the capital allowances section: what you bought, which pool it goes in, the allowances claimed, and the written-down values carried forward.

Sole traders and partnerships claim through the Self Assessment tax return. The same information applies.

It's worth keeping a separate capital allowances computation showing, for each pool: opening written-down value, additions, disposals, allowances claimed, any balancing charge or allowance, and the closing value carried forward. Keep purchase invoices and your workings.

A few common mistakes to avoid:

• Claiming on assets you lease rather than own
• Forgetting the private-use adjustment on sole trader assets
• Using the wrong allowance type for cars
• Missing the April 2026 main-pool rate change for new spending

You're responsible for getting the figures right, and HMRC can charge penalties for incorrect claims, which is why many businesses ask an accountant to handle it.

Want help claiming capital allowances correctly?

Capital allowances are easy to get wrong and expensive to under-claim. Zmartly's accountants make sure you claim the maximum relief, on time, with the right allowance for each asset. Book a free 20-minute call with a Zmartly accountant to talk through your next big purchase.

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