Capital allowances: a practical guide for UK businesses

Capital allowances are a form of tax relief available for expenditure incurred on capital assets bought for use in a business.

Why are capital allowances important?

In general, the depreciation of assets included as an expense in a business’s accounts cannot be used to reduce the business’s profits for tax purposes. This is because it’s a capital rather than revenue expense. Instead, tax relief is given through capital allowances as a deduction against taxable profits.

Who can claim capital allowances?

Capital allowances are available to companies, partnerships and individuals if their trading profits are chargeable to UK corporation or income tax.

For partnerships and individuals using the cash basis to prepare their accounts (instead of the traditional accruals basis), they usually only need to claim capital allowances on cars as the cost of most capital equipment can be treated as an expense for tax purposes.

What capital allowances can I claim?

The capital allowances available and the rates of those allowances have changed several times in recent years and some allowances are only available to some types of businesses. The main capital allowances currently available are summarised below.

First year allowances

Companies chargeable to UK corporation tax (including corporate members of a partnership) that buy new and unused (i.e. not second-hand) plant and machinery can claim a first-year allowance in the year the asset is bought of:

• 100% of the cost of qualifying ‘main pool’ plant and machinery (such as office furniture, computer equipment, company commercial vehicles etc) but not cars (known as ‘full expensing’), and
• 50% of the cost of ‘special rate’ assets (such as fixtures that form part of a building, like air conditioning systems, electrical systems and heating systems, and long-life assets) but again not cars (known as ‘SR Allowance’). On the remaining 50% balance, a standard rate of writing down allowances (see below) can be claimed at 6% a year on a reducing balance basis.

Full Expensing for main pool plant and machinery was introduced to replace the temporary 130% Super Deduction in April 2023 and has since been made permanent.

Within the 2025 Autumn budget the chancellor announced the introduction of a new 40% first year allowance. This is available on new and unused plant and machinery which specifically extends to assets used for the provision of leasing, WDA available to be claimed from April 2026.

This first-year allowance is also available to be claimed on qualifying expenditure incurred by unincorporated businesses. Further guidance is expected to be released by parliament for this relief over the coming months.

There’s no limit on the amount of expenditure that can qualify for these allowances. Where an asset on which full expensing or a 50% first year allowance has been claimed is disposed of, the disposal value is immediately taxable and therefore allowances can be clawed back earlier.

Annual investment allowance

An annual investment allowance (AIA) is available for the first £1 million spent on plant and machinery, integral features and long-life assets (but not cars) each year. This provides a 100% first year allowance, meaning full tax relief is given in the year incurred.

The government committed in the Autumn Budget 2024 to maintain the £1 million AIA for this Parliament.

A single AIA is shared between all companies in a group or under common control and can be allocated to different expenditure in whichever way maximises the overall tax benefit. Note that for a partnership, AIA will only be available where all the members are individuals.

If a company has special rate expenditure not covered by the AIA, 50% first-year allowances can potentially be claimed on the excess.

Main pool writing down allowances

Where the cost of main pool plant and machinery (including second hand electric cars and new or second hand cars with CO2 emissions of 50g/km or below) hasn’t been claimed under full expensing, first year allowances or AIA, the cost of these assets is added to the ‘main pool’ and a writing down allowance (WDA) of 18% of the remaining pool balance is given per year, on a reducing balance basis.

Within the 2025 Autumn budget the chancellor announced that the rate of WDA for main pool plant and machinery will reduce from 18% to 14% from April 2026.

Separate pools are needed for short life assets and assets which are used for non-business purposes.

Special rate writing down allowances

Where the cost of special rate assets (including new or second-hand cars with CO2 emissions of more than 50g/km) hasn’t been claimed under full expensing, first year allowances or AIA, the cost is added to a ‘special rate’ pool, and attracts a 6% per year WDA, again on a reducing balance basis.

Assets that are considered to have a useful economic life of 25 years or more, i.e. long-life assets, will also attract relief at 6% WDA per annum.

Structures and buildings allowance

Structures and buildings allowance (‘SBA’) is available for qualifying capital expenditure incurred on the conversion or renovation of a non-residential structure or building, claimable from when the asset is first brought into use.

The relief is provided at 3% WDA per year on a straight-line basis and to make a claim a supporting ‘Allowances Statement’ must be prepared and kept on file.

When it comes to selling a property where SBA has been claimed, SBA will not give rise to a balancing allowance or charge for the seller. However, the SBA already claimed will be added to the disposal proceeds and so may increase the tax charged on sale. The purchaser will be entitled to claim the remaining SBA available, assuming the relevant conditions are met.

Other accelerated reliefs

Accelerated first year allowances may be available where qualifying expenditure has been incurred in relation to the following (subject to meeting specific conditions):

Land remediation relief (‘LRR’)

150% first year allowance available on qualifying expenditure incurred on the remediation of contaminated land.

Relief may be available where expenditure has been incurred on the removal of contaminated soil and water, treatment of harmful organisms, removal of natural contaminants (i.e. radon and arsenic), removal of asbestos and the removal of invasive plants (Japanese knotweed).
Where a business is loss making, the claimant can surrender losses (where applicable) for a tax credit at 16%.

Research and Development Allowances (‘RDA’)

100% first year allowance available for qualifying expenditure incurred in relation to the facilities or equipment used for the purposes of carrying out qualifying R&D.

Freeport / Investment zones

100% FYA available on qualifying expenditure incurred on plant and machinery within a UK Freeport or Investment Zone special tax site.

In addition, an enhanced 10% WDA per annum is available for qualifying SBA expenditure incurred on the special tax site.

Vehicle first year allowances

Until 31 March 2027 for companies and 5 April 2027 for unincorporated businesses, first year allowances of 100% can be claimed on zero-emission cars and electric vehicle charging points (updated in the 2025 Autumn budget).

Capital allowances on second-hand property purchases

When buying a second-hand commercial building with fixtures on which capital allowances have or could have been claimed by the seller, for capital allowances to be available on those fixtures to the purchaser:

• The seller must pool the expenditure on the fixtures before the sale, and
• The value of the fixtures must be fixed, usually by the seller and buyer making a joint section 198 election within two years of the purchase.

Failure to meet these conditions can result in the purchaser not being able to claim any capital allowances on the fixtures, and potentially the seller having previously claimed capital allowances clawed back.

From a practical perspective, buyers and sellers will often agree to the pooling of expenditure and the fixing of value (e.g. via a section 198 election) requirements as part of the disposal process with agreed actions set out in the legal documentation for the sale and purchase of the property.

Where a claim hasn’t been made and entitlement has been established, to assess the value of the fixtures inherent within the building, a ‘just and reasonable apportionment’ of the purchase expenditure between the land, building and fixtures will be required to identify the qualifying expenditure.

How we can help

If you’re considering investing in new capital assets for your business, we can help make sure you make the most of the capital allowances available to you. We can also check previous claims and assist you with your record keeping, elections, assessments and reporting obligations.

To find out more about capital allowances and how we can help you maximise your claims, please speak to your usual Saffery contact, or get in touch with Phoebe Hindlet.

Useful Resources:

Capital Allowances Overview – Gov.Uk