Key facts
- Capital allowances replace depreciation in the Corporation Tax computation — depreciation itself is always added back.
- The main types are the Annual Investment Allowance (AIA), full expensing, first-year allowances, and writing down allowances (WDA).
- Qualifying expenditure is on plant and machinery used for the purposes of the trade.
- Assets are allocated to capital allowance “pools” — the main rate pool (18%) and the special rate pool (6%).
How Capital Allowances Reduce Your Corporation Tax
When a company buys a long-term asset (plant, machinery, equipment, vehicles), the cost is capital expenditure and cannot be deducted as a trading expense. Instead, the company claims capital allowances — a series of tax-approved deductions that spread the cost over time or, in some cases, give 100% relief in the year of purchase.[1]
In the tax computation, the company:
- Adds back the depreciation charged in the accounts (always disallowable)
- Deducts capital allowances calculated under HMRC’s rules
The capital allowances figure may be higher, lower, or equal to the depreciation charge, depending on the type of asset and the allowance claimed.
What Qualifies as Plant & Machinery?
“Plant and machinery” is not exhaustively defined in legislation, but HMRC accepts a wide range of assets used in the business:[2]
- Computers, servers, and IT equipment
- Office furniture and fittings
- Manufacturing machinery and tools
- Vehicles (including cars, vans, and lorries)
- Heating, lighting, and ventilation systems
- Refrigeration and air conditioning
- Safety and security equipment
- Integral features of buildings (lifts, escalators, electrical systems, cold-water systems)
Items that do not qualify include land, buildings themselves (but see Structures & Buildings Allowance), and assets not used for the trade.
Types of Capital Allowance
Companies can claim several different types of allowance, each with its own rules:[1]
| Allowance | Rate | Key Details |
|---|---|---|
| Annual Investment Allowance (AIA) | 100% | Up to £1 million per year on qualifying plant & machinery (not cars)[3] |
| Full expensing | 100% | Permanent 100% FYA for companies on new main-rate plant & machinery (from April 2023) |
| 50% first-year allowance | 50% | For new special-rate assets (from April 2023, companies only) |
| Writing down allowance — main pool | 18% | Reducing balance on the main rate pool[4] |
| Writing down allowance — special rate | 6% | Reducing balance on long-life assets, integral features, and high-emission cars |
| Structures & Buildings Allowance (SBA) | 3% | Straight-line on eligible construction costs of commercial buildings |
Claiming order: In practice, companies typically claim AIA or full expensing first (for 100% immediate relief), and only use writing down allowances for expenditure that exceeds the AIA limit, for cars, or for second-hand special-rate assets.
How Capital Allowance Pools Work
Assets on which writing down allowances are claimed are grouped into pools:[4]
- Main rate pool (18%): Most plant and machinery, including cars with CO2 emissions up to 50 g/km
- Special rate pool (6%): Integral features, long-life assets (useful life 25+ years), thermal insulation, and cars with CO2 emissions above 50 g/km
- Single asset pools: Used for short-life assets (where an election is made) and assets with private use
Each year, the writing down allowance is calculated on the reducing balance of the pool — not on the original cost. When an asset is sold or scrapped, the disposal proceeds are deducted from the pool, and a balancing adjustment may arise.
How to Claim Capital Allowances
Capital allowances are claimed on the company’s CT600 Corporation Tax Return, which you can complete and file online. The claim is supported by a capital allowances computation showing:
- Opening pool balances
- Additions in the period (analysed by type of allowance claimed)
- Disposals in the period
- Allowances claimed (AIA, FYA, WDA)
- Closing pool balances carried forward
Short accounting periods: If a company’s accounting period is shorter than 12 months, the AIA limit and writing down allowances are reduced proportionally. For example, a 6-month period gives an AIA limit of £500,000.[3]
Frequently Asked Questions
What are capital allowances for Corporation Tax?
Capital allowances are tax-approved deductions that replace accounting depreciation in the Corporation Tax computation. They allow companies to deduct the cost of qualifying plant and machinery from taxable profits.
Why is depreciation added back for Corporation Tax?
Depreciation is always disallowed for tax purposes because it is an accounting estimate. HMRC replaces it with capital allowances, which follow standardised rates set by legislation rather than the company’s own depreciation policy.
What is the difference between the main rate and special rate pool?
The main rate pool attracts a writing down allowance of 18% per year and covers most plant and machinery. The special rate pool attracts only 6% and covers integral features, long-life assets, and cars with CO2 emissions above 50 g/km.
Can I claim 100% tax relief on plant and machinery?
Yes. The Annual Investment Allowance gives 100% relief up to £1 million per year on qualifying plant and machinery. Companies can also claim full expensing (100%) on new main-rate assets with no annual limit.
Further Reading
- Annual Investment Allowance (AIA) — detailed guide to the £1 million 100% deduction
- Full Expensing — the permanent 100% FYA for companies
- Writing Down Allowances — the 18% and 6% reducing-balance allowances
- Structures & Buildings Allowance — 3% annual relief on commercial buildings
- Balancing Charges & Disposals — what happens when you sell or dispose of assets
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Sources
- Claim capital allowances — GOV.UK
- Capital Allowances Manual — HMRC
- Annual Investment Allowance — GOV.UK
- Writing down allowances — GOV.UK