Capital Allowances Details
📊 Capital Allowances Breakdown
When businesses in the UK purchase capital assets (such as machinery, vans, computers, tools, or office furniture), standard accounting depreciation is NOT tax-deductible for Income Tax or Corporation Tax.
Instead, UK tax law requires businesses to claim statutory Capital Allowances to deduct the cost of capital assets against taxable profits.
⚙️ Statutory Capital Allowance Rates & Rules for 2026/27
1. Annual Investment Allowance (AIA)
- 100% First-Year Deduction: Allows businesses (sole traders, partnerships, and limited companies) to write off 100% of the cost of qualifying plant and machinery in the year of purchase.
- Statutory AIA Limit: Capped at £1,000,000 per year.
2. Full Expensing (Limited Companies Only)
- 100% Uncapped First-Year Allowance: Permanent 100% tax write-off for brand-new main rate plant and machinery purchased by limited companies, with zero upper spending limit.
- 50% First-Year Allowance: Applies to brand-new special rate pool assets (like electrical systems or solar panels).
3. Writing Down Allowances (WDAs)
For asset expenditure exceeding the £1,000,000 AIA limit or for second-hand assets not qualifying for Full Expensing:
- Main Rate Pool: 18% per year on a reducing balance basis.
- Special Rate Pool: 6% per year on a reducing balance basis (covers integral building features, long-life assets, and high-emission cars).
📊 Practical Capital Allowance Worked Examples
Below are two worked calculation examples illustrating capital allowance tax savings:
- Equipment Cost: **£25,000.00**
- AIA Allowance (100%): **£25,000.00** (Full Year 1 Write-Off)
- Written Down Value Carried Forward: **£0.00**
Calculation: Taxable profit reduced by £25,000. Corporation Tax saving = £25,000 × 25% = £6,250.00.
- Vehicle Cost: **£30,000.00**
- Year 1 Main Pool WDA (18%): £30,000 × 18% = **£5,400.00**
- Written Down Value (WDV) Carried Forward: £30,000 - £5,400 = **£24,600.00**
Calculation: Taxable profit reduced by £5,400. Corporation Tax saving = £5,400 × 25% = £1,350.00.
📑 Common Pitfalls & Capital Allowance Warnings
- Cars Do Not Qualify for AIA: Passenger cars are strictly excluded from the Annual Investment Allowance. Zero-emission electric cars receive a 100% First-Year Allowance, while petrol/diesel cars enter the 18% or 6% WDA pools based on CO2 emissions.
- Accounting Depreciation vs. Tax Allowance Add-Back: In annual accounts, accounting depreciation MUST be added back to accounting profit on your tax return before deducting statutory Capital Allowances.
- Balancing Charges on Asset Sales: If you sell a capital asset that previously received 100% AIA relief, the sale proceeds are added back to taxable profits as a Balancing Charge, incurring tax in the year of sale.
❓ Frequently Asked Questions (FAQ)
AIA applies to both sole traders and limited companies with a £1M cap and covers second-hand equipment. Full Expensing is exclusive to limited companies, has no upper limit, but requires assets to be brand new.
Integral building features include electrical wiring, cold water systems, space heating, air conditioning, lifts, and solar panels. These assets enter the 6% Special Rate Pool.
If the remaining written-down balance in your main rate or special rate pool falls to **£1,000 or less**, you can write off the entire remaining balance in one go using the Small Pools Allowance.
Yes, but sole traders must reduce the capital allowance by the percentage of personal non-business use (e.g. if a car is 60% business and 40% personal, you claim 60% of the WDA allowance).