Capital Allowances Explained UK: A Practical Guide to Claiming Tax Relief in 2026/27

Capital allowances are the UK tax system’s way of giving businesses relief for money spent on long-lasting assets such as machinery, equipment and commercial vehicles. In plain terms, they let you deduct the cost of qualifying assets from your taxable profits, which lowers your tax bill. For the 2026/27 tax year, the headline reliefs are the Annual Investment Allowance (a 100% deduction on up to £1 million of qualifying spending), full expensing for limited companies (100% with no upper limit on new plant and machinery), writing down allowances at 14% or 6% a year, and the Structures and Buildings Allowance at 3% a year. This guide shows you exactly how each one works, with a worked example and the step-by-step claiming process.

What Are Capital Allowances?

Capital allowances are tax reliefs for capital expenditure. Capital expenditure is money you spend on assets your business will use for a long time, such as a van, a computer, a lathe or a shop fit-out. This is different from day-to-day revenue spending, such as rent, stock or wages, which you deduct from your profits as ordinary business expenses.

The key point is that depreciation in your accounts is not tax deductible. HMRC ignores it. Instead, you claim capital allowances on your tax return to get the tax relief. The two systems often give similar answers over time, but they follow different rules.

You claim capital allowances in the accounting period in which you buy and start using the asset. If you spend below the Annual Investment Allowance limit of £1 million, you can usually deduct the full cost in the year of purchase. That timing matters. A £15,000 machine claimed this year cuts this year’s tax bill, not next decade’s.

For a broader view of how allowances fit into your overall tax position, see our tax planning strategies for small business owners.

The 5 Types of Capital Allowances Available in 2026/27

Here is the complete picture as of the 2026/27 tax year. Figures below are for illustration of the rules, not the actual tax rates. Always confirm current figures on gov.uk.

You do not have to pick just one. Most small businesses use the Annual Investment Allowance for the bulk of their spending and fall back on the other reliefs for anything it does not cover.

Annual Investment Allowance: The One Most Businesses Use

The Annual Investment Allowance (AIA) is the relief that matters most to small businesses. It gives you a 100% deduction in the year you buy the asset, on up to £1 million of qualifying spending per year. It is available to sole traders, partnerships and limited companies.

What qualifies for AIA

Most plant and machinery qualifies, whether bought new or second-hand. Typical examples include:

• Machinery, tools and manufacturing equipment
• Computers, servers and IT equipment
• Office furniture and fixtures
• Commercial vehicles such as vans, lorries and motorcycles
• Refrigeration, security and catering equipment
• Integral building features such as electrical systems, heating and lifts

What does NOT qualify for AIA

• Cars of any kind, whatever their emissions
• Assets you buy to lease to someone else
• Assets you already owned personally before the business started using them
• Land and buildings (these may qualify for SBA instead)

Two practical details catch people out. First, the £1 million limit is pro-rated for accounting periods shorter than 12 months, so a six-month period gives you £500,000. Second, connected businesses and company groups must share a single £1 million limit. HMRC does check this.

For most UK small businesses spending well under £1 million a year on equipment, AIA means immediate full relief with no complexity. This is why it should be the first relief you consider.

Full Expensing and First-Year Allowances Explained

Full expensing was made permanent in March 2024 and remains available in 2026/27. It gives limited companies a 100% deduction in year one on qualifying new, unused main-rate plant and machinery, with no upper limit. Unlike AIA, second-hand equipment does not qualify, and sole traders cannot use it.

Companies also get a 50% first-year allowance on qualifying new, unused special-rate expenditure (for example, integral features of a building). The remaining 50% goes into the special rate pool and attracts writing down allowances at 6% a year.

From 1 January 2026, a new 40% first-year allowance applies to new, unused main-rate plant and machinery bought by any business, including sole traders. You deduct 40% in year one and the remaining 60% attracts writing down allowances at 14% a year. Cars are excluded.

The practical effect of the new 40% allowance is that sole traders buying new equipment now have a useful first-year option even where they do not want to use all of their AIA in one year, perhaps because they want to spread the relief across years.

Writing Down Allowances: What Happens to the Rest

Writing down allowances (WDAs) cover spending that does not qualify for AIA or a first-year allowance, and any spending above the £1 million AIA limit. The asset goes into a pool, and each year you deduct a percentage of the pool’s remaining balance. This is the reducing balance method.

There are two pools:

• The main pool. This holds most plant and machinery, plus cars with CO2 emissions of 50g/km or less. The rate is 14% a year from April 2026. It was 18% before that date, so a period straddling 1 April 2026 (companies) or 6 April 2026 (everyone else) uses a hybrid rate.
• The special rate pool. This holds integral features of buildings, long-life assets (expected life of 25 years or more) and cars emitting more than 50g/km CO2. The rate is 6% a year.

A small-pools rule applies: if a pool balance falls to £1,000 or less, you can claim the whole balance in one go.

Structures and Buildings Allowance: For Property Costs

If you build, buy new or renovate a commercial building, the Structures and Buildings Allowance (SBA) gives 3% a year on a straight-line basis. That means 3% of the original cost each year for 33 and a third years.

SBA covers non-residential buildings and structures such as offices, retail units, factories and warehouses, including the construction contract and related professional fees. It does not cover land, and it does not cover dwellings. You need to identify the qualifying expenditure separately from the building’s general cost, which is why good invoices and quantity surveyor reports matter.

A separate higher SBA rate applies in designated Freeport and Investment Zones, currently 10% a year. Check the current zone rules on gov.uk before relying on this.

Worked Example: £15,000 Machinery, AIA vs Writing Down Allowances

This example is illustrative. It shows how the choice of allowance changes the timing of your tax saving. It assumes new machinery bought and used in the business in the 2026/27 tax year, and it uses illustrative tax rates of 20% (sole trader at basic rate) and 25% (limited company at the main corporation tax rate). Your actual tax rate may differ.

The purchase: £15,000 of new machinery.

Option A: Claim the Annual Investment Allowance

You deduct the full £15,000 in year one.

Option B: Claim writing down allowances at 14% a year

The machinery goes into the main pool and you deduct 14% of the reducing balance each year.

Year-one saving under AIA (£3,000) is more than seven times the year-one saving under writing down allowances (£420). Over many years the totals converge, but the timing difference is large.

When would you NOT take the AIA?

Usually you should take the 100% deduction. The exceptions are narrow but real:

• You are making a loss or have very low profits this year. Spreading the relief over later, more profitable years can be worth more.
• You expect to move into a higher tax bracket next year. A deduction at 40% is worth twice one at 20%.
• You want to preserve personal allowances. Timing matters in tax planning generally, as covered in our tax planning strategies.

If you choose not to claim AIA, you do not lose the relief. The unclaimed amount simply goes into the pool and attracts writing down allowances instead.

How to Claim Capital Allowances (Step by Step)

Follow these steps in order. Claiming is done on your tax return, not separately.

Step 1: Confirm the asset qualifies

Check that the item is plant or machinery used in your business, that it qualifies for the allowance you want (AIA, first-year allowance or WDA), and that you have not already claimed the full cost as an ordinary expense.

Step 2: Decide which allowance to claim

Claim AIA first for qualifying spending up to £1 million. Use full expensing or a first-year allowance for new assets where that gives a better result. Put anything left over into the relevant pool for writing down allowances. If you use an asset partly for private purposes, claim only the business proportion.

Step 3: Keep the right records

HMRC can ask for evidence years later. Keep:

• Purchase invoices showing the date, supplier, item and price
• Delivery notes proving when the asset entered use
• Lease or hire-purchase agreements if relevant
• A note of the business-use percentage for mixed-use assets
• Records of any later sale or disposal, including the sale price

Step 4: Complete the right form

Sole traders: Self Assessment (SA103S short or SA103F full). The capital allowances section includes these boxes:

• Box 23: Annual Investment Allowance
• Box 24: Allowance for small balance of unrelieved expenditure
• Box 24.1: Zero-emission car allowance
• Box 25: Other capital allowances (this is where most writing down allowances go)
• Box 25.1: Structures and Buildings Allowance
• Box 26: Total balancing charges, for example where you disposed of an item for more than its tax value

These boxes reduce your net business profit for tax purposes in Box 28.

Limited companies: the company tax return (CT600). Capital allowances are claimed through the return and the supporting tax computations. Box 315 is used for balancing charges, which are added back to your taxable profits when you sell an asset for more than its tax written-down value.

Step 5: Watch the deadlines

• Self Assessment: the online filing deadline is 31 January following the end of the tax year. Miss it and penalties apply.
• Company tax return: you must file your CT600 within 12 months of the end of your accounting period.

Step 6: Note the cash basis exception

If you are a sole trader using the cash basis, you generally claim the cost of most equipment as an ordinary allowable expense, not as a capital allowance. Capital allowances still apply to cars and to certain assets excluded from cash basis relief. If you are unsure which basis you use, check your last tax return.

Special Rules: Cars, Leased Assets and Private Use

Cars

Cars get their own rules, and they are the most common source of mistakes:

• Cars never qualify for AIA, whatever their emissions.
• New, unused zero-emission cars: 100% first-year allowance in the year of purchase. This also applies to electric vehicle charging points.
• Cars emitting 50g/km CO2 or less (but not zero): go into the main pool and attract 14% writing down allowances.
• Cars emitting more than 50g/km CO2: go into the special rate pool and attract 6% writing down allowances.
• Leased or hired cars: you cannot claim capital allowances on them at all. Instead, you claim the lease payments as an expense, with a restriction for higher-emission cars.

Leased and hired assets generally

You cannot claim capital allowances on assets you lease, hire or rent, because you do not own them. You claim the payments as revenue expenditure instead. The exception is certain long funding leases, where special rules can treat you as the owner for tax purposes. Get advice before assuming either way.

Private use

If you use an asset partly outside the business, such as a laptop that is 80% business and 20% personal, you claim only the business proportion. With writing down allowances, private-use assets go into a separate single-asset pool rather than the general pool.

Sole Trader vs Limited Company: Claiming Checklist

The rules differ by business structure. Use this checklist to make sure you claim correctly.

Sole traders and partnerships:

• Use AIA up to £1 million for qualifying plant and machinery (new or second-hand)
• You can also use the 40% first-year allowance on new, unused main-rate equipment from 1 January 2026
• You cannot use full expensing (companies only)
• Claim through Self Assessment boxes 23 to 26
• Reduce your claim for private use
• If you use the cash basis, most equipment costs are claimed as ordinary expenses instead

Limited companies:

• Use AIA up to £1 million, or full expensing (100%, no limit) for new, unused main-rate equipment
• Consider the 50% first-year allowance for new, unused special-rate expenditure
• Claim through the CT600 and tax computations; balancing charges go in Box 315
• File within 12 months of the accounting period end
• Remember depreciation in the accounts is added back and replaced by capital allowances

Our companion piece on corporation tax rates for 2026/27 explains how the tax rates in the worked example above apply to your company’s profits.

Common Mistakes to Avoid

1. Claiming AIA on a car. Cars are excluded from AIA entirely. They go to the main or special rate pool, or qualify for the zero-emission first-year allowance.
2. Ignoring the £1 million limit on short periods. A six-month accounting period gives you a £500,000 AIA limit, not £1 million.
3. Forgetting that connected companies share one limit. Groups of companies get a single £1 million AIA between them.
4. Claiming leased assets. Lease payments are expenses, not capital allowances.
5. Missing balancing charges. When you sell an asset for more than its tax value, the excess is taxable. Companies report it in CT600 Box 315; sole traders use SA103S Box 26.
6. Relying on outdated guides. Some older articles still list allowances that no longer exist. One example is the enhanced capital allowance regime for designated energy- and water-efficient equipment, which closed in 2020. Always verify against current HMRC guidance on gov.uk.

Frequently Asked Questions

What are capital allowances in simple terms?

Capital allowances are tax deductions for the cost of long-lasting business assets. Because depreciation in your accounts is not tax deductible, HMRC gives you these allowances instead so that the cost of equipment, machinery and vehicles reduces your taxable profit.

Who can claim capital allowances?

Sole traders, partnerships and limited companies can all claim capital allowances, as long as the assets are used in a qualifying business activity. The specific reliefs available differ. Full expensing, for example, is only available to limited companies.

What is the Annual Investment Allowance limit for 2026/27?

The Annual Investment Allowance is £1 million per year as of the 2026/27 tax year, giving a 100% deduction on qualifying plant and machinery up to that amount. The limit is pro-rated for accounting periods of less than 12 months.

Can I claim capital allowances on a car?

You cannot claim the Annual Investment Allowance on any car. New, unused zero-emission cars qualify for a 100% first-year allowance. Other cars go into the main pool (50g/km CO2 or less, at 14% a year) or the special rate pool (over 50g/km, at 6% a year).

Do I claim capital allowances every year?

You claim a first-year allowance or AIA in the year you buy the asset. Writing down allowances and the Structures and Buildings Allowance are claimed every year until the pool is exhausted or the building relief period ends, so yes, they are an annual claim.

What is the difference between capital allowances and depreciation?

Depreciation is an accounting concept that spreads an asset’s cost over its useful life in your accounts. HMRC does not allow depreciation as a tax deduction. Capital allowances are the separate tax system that gives you the deduction instead.

Can I claim capital allowances on second-hand equipment?

Yes for the Annual Investment Allowance, which covers new and second-hand plant and machinery. Full expensing and the 40% first-year allowance require the asset to be new and unused, so they do not apply to second-hand purchases.

What happens when I sell an asset I claimed allowances on?

The sale proceeds are deducted from the relevant pool. If the proceeds exceed the pool balance, the excess is a balancing charge and is added to your taxable profits. If the proceeds are less, you may get a balancing allowance, giving extra relief.

Do capital allowances affect my balance sheet?

Yes. Understanding how allowances interact with your accounts helps you read your financial position accurately. Our guide to reading and analysing financial statements explains where asset values and tax relief appear in the accounts.

What records do I need to keep for a capital allowances claim?

Keep purchase invoices with dates and prices, delivery notes, lease agreements where relevant, a note of business-use percentages for mixed-use assets, and records of any disposals. HMRC can open an enquiry into a return up to 12 months after filing, so keep records for at least six years.

Can I claim capital allowances if I use the cash basis?

Under the cash basis, most equipment costs are claimed as ordinary allowable expenses rather than capital allowances. Capital allowances still apply to cars and certain other assets. Check your basis on your last return before deciding.

Is there a time limit for claiming capital allowances?

You claim them on the tax return for the period in which the expenditure was incurred. You can amend a filed return within 12 months of the filing deadline. You cannot normally carry an unclaimed AIA forward to a later year, so missing the claim can mean losing the timing benefit.

Conclusion

Capital allowances are one of the most valuable reliefs available to UK small businesses, and they are entirely within your control. For most readers, the decision is simple: use the Annual Investment Allowance for qualifying equipment up to £1 million, use full expensing or a first-year allowance for new assets where that helps, and let writing down allowances handle the rest.

The worked example shows why the choice matters. On £15,000 of machinery, claiming AIA can give you seven times the first-year tax saving of writing down allowances. The freshness of your knowledge matters too. Rates changed in April 2026, a new 40% first-year allowance arrived in January 2026, and some older guides still cite reliefs that no longer exist.

This article is general information only and is not financial or tax advice. Tax rules change, and the figures here apply as of the 2026/27 tax year. Verify current rates on gov.uk or with HMRC, and consider speaking to a qualified accountant before making significant capital spending decisions.