One of the most effective ways to lower your tax bill is claiming Capital Allowances. These allow you to deduct the cost of certain long-term business assets from your taxable profits.
What are Capital Allowances?
Capital Allowances are a form of tax relief. They let businesses deduct all or part of the value of specific long-term assets, or Capital Assets, from their taxable profits. Most commonly, they apply to “Plant and Machinery“, which includes:
- Tools and equipment
- Business vehicles (vans, lorries but not typically cars)
- Office furniture and fixtures
- Computers and software
- Integral building features such as lifts or air-conditioning systems
To qualify, the business must also own the assets and use them “Wholly and Exclusively” for business purposes.
What You Cannot Claim For
- Buildings and land
- Assets used solely for entertainment
- Leased items usually do not qualify unless the lease is a Hire Purchase Agreement
- Doors, gates and mains water or gas systems (though some may qualify for different reliefs)
Moreover, as of April 2025, Furnished Holiday Lettings no longer qualify for Plant and Machinery Capital Allowances. Such businesses are now standard property businesses and the associated tax reliefs have been withdrawn.
Why Use Capital Allowances?
By reducing your taxable profits, Capital Allowances help lower the amount of tax your business pays. In many cases, you can deduct the full cost of an item in the year you buy it. However, in other cases, you can spread the deduction over several years.
If your claim exceeds your profit in a given year, you can carry the balance forward to offset future tax bills.
Types of Capital Allowances
1. Annual Investment Allowance (AIA)
AIA lets you claim up to £1,000,000 each year on qualifying plant and machinery. This means you can deduct the full cost from your profits. Exclusions include:
- Cars
- Gifts
- Assets owned before being used in the business
If you exceed the £1,000,000 limit, you can claim the excess using Writing Down Allowances.
2. 100% First-Year Allowances
Some items qualify for a 100% deduction in the year they are purchased. These must be new and include:
- Electric vehicles with zero emissions
- Charging equipment
- Gas refuelling station equipment
- Certain energy-saving technologies
3. Super-Deduction and 50% Special Rate Allowance (April 2021 to March 2023)
These were temporary measures available only to companies that acquired qualifying assets between 1st April 2021 and 31st March 2023.
- 130% Super-Deduction for main rate assets
- 50% First-Year Allowance for special rate assets
Additionally, only companies could claim and they could not claim both allowances on the same asset. Both of these allowances have been replaced by the permanent Full Expensing regime.
4. Full Expensing and 50% First-Year Allowance (From April 2023)
From April 2023, companies can fully expense qualifying plant and machinery, deducting 100% of the cost in the year of purchase. Special rate assets qualify for a 50% First-Year Allowance.
Full expensing is available only to companies subject to Corporation Tax. It does not apply to unincorporated businesses.
5. Writing Down Allowances
If an item does not qualify for AIA or you have exceeded your AIA, use Writing Down Allowances to claim a percentage of the asset’s value each year.
- 18% Main Rate for general plant and machinery
- 6% Special Rate for long-life assets or high-emission cars
The claimable amount reduces each year and rolls forward into future accounting periods.
Business Cars
Cars have their own set of rules. They do not qualify for AIA, but you can still claim using one of the following:
- 100% First-Year Allowance for new and unused fully-electric or zero-emission cars
- 18% Main Rate for low-emission cars
- 6% Special Rate for higher-emission cars
Claims are adjusted if the car is used for personal as well as business purposes. Commercial vehicles like vans and lorries are also eligible for AIA.
Fixtures, Integral Features and Alterations
You can also claim for certain fixtures and features within buildings:
- Fitted kitchens and bathrooms
- Fire alarms and security systems
- Heating and air conditioning
- Electrical and lighting systems
If you are buying a property, you can only claim fixtures if the seller previously claimed and you both agree on a value, typically using Section 198 election. Building alterations necessary to install equipment can also qualify, but you should claim general repairs as expenses.
Structures and Buildings Allowance
Buildings do not qualify for plant and machinery allowances, but you may be able to claim the Structures and Buildings Allowance. This allowance applies to the costs of building or renovating commercial property, excluding dwellings and the land they sit on. The relief is spread over time.
How to Claim Capital Allowances
You can claim Capital Allowances on your tax return:
- Sole traders use Self Assessment
- Partnerships use the Partnership Return
- Limited companies use the Company Tax Return (CT600)
You should keep records of:
- Purchase details (date, amount, item)
- Type of allowance being claimed
For Hire Purchase items, you can claim once the asset is in use, even if payments are still due.
Selling or Disposing of Assets
When a business sells, scraps or gives away an asset, it becomes a “disposal”. You must compare the sale or disposal value with its written-down value:
- You may get extra tax relief if the sale price is lower
- You may owe a balancing charge if the sale price is higher
Unused Allowances and Carry Forwards
Didn’t use the full allowance this year? You can carry it forward. It becomes a “tax asset” that reduces future tax liabilities when profits rise.
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