If your business has bought equipment, tools, machinery or a van in the past year, capital allowances are how you get tax relief on that spending. They are one of the most valuable reliefs available to UK businesses, and one of the most underclaimed too.
However, the rules changed in 2026; the main writing down allowance has been cut, a new 40% first year allowance has arrived, and the timing of capital spending now matters more than it did.
What Are Capital Allowances and Why Do They Matter?
When you buy something the business will use for years, you cannot deduct the cost from profits the way you would a phone bill. That spending is ‘capital expenditure’, and the depreciation in your accounts is not allowable for tax. Capital allowances replace it.
The effect is real money. A company paying corporation tax at 25% that claims £40,000 of allowances cuts its tax bill by £10,000. The 25% rate applies to profits over £250,000. Smaller companies may pay 19% or a marginal rate in between, so their saving will be lower. For a sole trader the saving follows your marginal rate. Miss a claim and you pay more tax than you need to.
What Business Assets Qualify for Capital Allowances?
Most things you keep and use in the business count as ‘plant and machinery’: equipment, tools, computers, commercial vehicles, office furniture and machinery. Integral features within a building qualify too, such as electrical and heating systems, air conditioning and lifts, although those sit in a slower pool at 6%.
Land and the structure of a building do not qualify, although a separate structures and buildings allowance gives 3% a year on qualifying non-residential construction and renovation costs.
Qualifying and Non-Qualifying Assets with Practical Examples
Qualifying: a £6,000 CNC router, a £28,000 van, a £1,400 laptop, a £15,000 air conditioning system.
Not qualifying, or treated differently: land, the building itself, business entertainment assets, and anything leased in rather than bought, unless on hire purchase or a long funding lease. Repairs are not capital at all, so a replaced window comes off profits in full straight away. Cars are a special case. They never qualify for the annual investment allowance, and the rate depends on emissions.
Annual Investment Allowance (AIA) and Full Expensing Explained
The AIA gives a 100% deduction on qualifying plant and machinery in the year you buy it, up to £1 million a year. It is open to companies, sole traders and partnerships, and covers second hand assets and integral features as well as new equipment. For most small businesses it does all the work.
Full expensing is the company-only relief above it: a 100% deduction with no cap on new and unused main rate plant and machinery, plus a 50% first year allowance on new special rate assets. It does not cover second hand assets, cars or assets bought for leasing.
New from 1 January 2026 is a 40% first year allowance on new and unused main rate plant and machinery, cars excluded. It is aimed at businesses shut out of full expensing: sole traders, partnerships and leasing companies. It is not available on second hand assets.
Anything left over goes into a pool and attracts a writing down allowance each year. The main pool rate fell from 18% to 14% on 1 April 2026 for companies and 6 April 2026 for sole traders and partnerships. The special rate pool stays at 6%.
Which Capital Allowance Should You Claim?
There is an order to it. Use the AIA first, because it gives 100% relief on the widest range of assets, including second hand kit and integral features. Companies spending more than £1 million then move to full expensing for new main rate assets. Where full expensing is not open to you, the 40% first year allowance is the next best option above the AIA limit.
Timing matters too. If your accounting period straddles April 2026, the writing down allowance is a hybrid rate rather than one or the other: a company with a 31 December 2026 year end gets 14.99%. For example, with £10,000 left in the main pool, that company claims £1,499 for the year.
How to Claim Capital Allowances Correctly
Claims are made on your tax return, not separately: companies through the CT600, sole traders and partners through self assessment. The claim belongs to the period the expenditure was incurred, normally when the obligation to pay became unconditional rather than when the money left the bank. Claims are also subject to time limits, so older spend should be reviewed rather than left.
Three things make a claim stand up: a fixed asset register that ties back to the accounts, the invoices behind it, and a sensible split between capital and revenue. Assets on hire purchase qualify in full once brought into use, even though you are still paying for them. Sole traders using the cash basis can only claim on cars.
Common Capital Allowance Mistakes Businesses Should Avoid
- Claiming nothing on a property purchase or fit-out. Integral features often account for a fifth of the price, and the relief is lost if values are not agreed with the seller in writing.
- Treating a car like a van. Vans, lorries and most commercial vehicles get the AIA. Cars never do.
- Missing assets already written off in the accounts. Small items expensed as costs may still be capital for tax.
- Assuming it is too late. A pool can usually be adjusted for items left out in earlier years, so an unclaimed fit-out from 2021 may still be worth claiming.
- Claiming the AIA at the wrong time. Where profits are low this year and higher next, the full allowance now wastes relief worth more later.
How Capital Allowances Apply in Real Businesses Across Regional Business Hubs
Here is how it plays out in four sectors we deal with regularly. The figures are illustrative examples.
Construction Businesses Investing in Plant, Machinery and Specialist Equipment
A groundworks contractor buys a used excavator for £48,000 and two tipper trucks for £70,000. All of it qualifies for the AIA: a £118,000 deduction and £29,500 of corporation tax saved at 25%. The excavator being second hand makes no difference to the AIA, although it would rule out full expensing.
Manufacturing Businesses Expanding Production Capacity
A manufacturer installs a £1.4 million production line. The first £1 million is covered by the AIA, and as a limited company the balance qualifies for full expensing, so the whole £1.4 million comes off profits in year one. Trading as a partnership, the AIA would still cover the first £1 million, and the 40% first year allowance on the remaining £400,000 would give a £160,000 deduction in year one. The other £240,000 would go into the main pool at 14%.
Hospitality Businesses Investing in Commercial Kitchens and Fit-Outs
A restaurant spends £90,000 on a fit-out. Kitchen equipment, furniture and the till system are main rate plant. Wiring, lighting, heating and ventilation are integral features in the 6% pool. The AIA covers both, which is why it matters here: without it, £30,000 of integral features would take decades to relieve.
Physiotherapy Practices Upgrading Clinical Equipment and Facilities
A physiotherapy practice fits out a new clinic: £18,000 on couches, a shockwave therapy machine and rehab gym equipment, plus £9,000 on air conditioning and lighting. The equipment is main rate plant and the air conditioning an integral feature, and the AIA covers the lot. That £27,000 deduction is £6,750 of corporation tax at 25%.
How Julian Hobbs Helps Businesses Maximise Capital Allowances
We make sure nothing qualifying is missed and that the claim lands in the right year. That means reviewing capital spending as it happens rather than at the year end, splitting property and fit-out costs between plant, integral features and structure, and modelling the timing of a large purchase before it is committed.
For clients on our Growth and Virtual FD services this sits inside the monthly management accounts cycle, so a significant purchase is considered before the money is spent.
Supporting Businesses Across Hertfordshire, Welwyn Garden City and Surrounding Areas
We are based in Hertfordshire and act for businesses across Welwyn Garden City, Hatfield, St Albans and Stevenage, as well as clients across the UK. If you are planning equipment purchases, a fit-out or a property purchase, book a call with Julian Hobbs & Co and we will tell you what the claim is worth before you commit.
FAQs: Frequently Asked Questions
What is capital allowance?
A tax deduction for money spent on assets the business keeps and uses. It replaces the depreciation in your accounts, which is not allowable for tax.
Who can claim capital allowances?
Limited companies, sole traders and partnerships, provided the asset is used in the business. Full expensing is open only to companies.
What assets qualify for capital allowances?
Plant and machinery: equipment, tools, computers, commercial vehicles, furniture and machinery, plus integral features such as wiring, heating and air conditioning. Land and buildings do not.
What is the Annual Investment Allowance (AIA)?
A 100% deduction on up to £1 million of qualifying plant and machinery a year, available to all business types and covering second hand as well as new assets.
What is the capital allowances rate for 2026?
The main pool writing down allowance is 14% from 1 April 2026 for companies and 6 April 2026 for sole traders and partnerships. The special rate pool stays at 6%, the AIA is £1 million, and there is a new 40% first year allowance from 1 January 2026.
Can I claim capital allowances on a car?
Cars never qualify for the AIA. New zero emission cars bought by companies can get a 100% first year allowance, and other cars go into the main or special rate pool depending on emissions. Vans and most commercial vehicles qualify for the AIA.
What happens when you sell or scrap an asset?
The sale proceeds come off the pool. If the proceeds are more than the pool balance, a balancing charge can arise and add to your taxable profit. If the pool is closed with a shortfall, a balancing allowance may be due. A pool with a balance of £1,000 or less can be claimed in full under the small pools allowance.
What is the difference between capital expenditure and revenue expenditure?
Revenue expenditure is the day to day cost of running the business and comes off profits in full. Capital expenditure buys something lasting. Repairing an asset is usually revenue, replacing it outright usually capital.
Can sole traders claim capital allowances?
Yes, through self assessment, using the AIA and, from 1 January 2026, the 40% first year allowance. On the cash basis the claim is limited to cars.
Can I claim capital allowances on commercial property?
Not on the structure, but on the plant and integral features within it. On a purchase, values must be agreed with the seller in writing or the relief is lost.
How do I claim capital allowances?
Through the CT600 or your self assessment return for the period the expenditure was incurred, supported by a fixed asset register and invoices.
How can Julian Hobbs help my business claim capital allowances?
We review your capital spending, identify everything that qualifies, get the split right on property and fit-out costs, and time the claim so it saves the most tax. Get in touch.
