Capital Allowances & Timing

Key facts

The Annual Investment Allowance (AIA) gives a 100% deduction for qualifying assets up to £1,000,000 per year.
Full expensing (from April 2023) gives companies 100% relief on qualifying plant and machinery with no monetary cap.
Writing down allowances are 18% (main pool) and 6% (special rate pool) on a reducing-balance basis.
Timing asset purchases at the right point in your accounting period can bring forward tax relief.
Capital allowances reduce your taxable profits, not your tax bill directly.

What Are Capital Allowances?

Capital allowances let you deduct the cost of business assets from your taxable profits. Unlike day-to-day expenses (which are fully deductible in the year incurred), capital expenditure on assets like equipment, vehicles, and machinery is relieved through the capital allowances system.^[1]

Types of Capital Allowance

Allowance	Rate	Who Can Claim	Cap
Annual Investment Allowance (AIA)	100%	All businesses	£1,000,000/year
Full expensing	100%	Companies only	No cap
50% first-year allowance	50%	Companies (special rate assets)	No cap
Main pool WDA	18%	All businesses	Reducing balance
Special rate pool WDA	6%	All businesses	Reducing balance
Structures & Buildings (SBA)	3%	All businesses	Straight line, over 33⅓ years

The Annual Investment Allowance

The AIA gives a 100% deduction for qualifying plant and machinery expenditure, up to £1,000,000 per year. This is the primary allowance for most small businesses.^[2]

Available to sole traders, partnerships, and companies
Covers most plant and machinery (not cars)
The £1,000,000 limit is shared between associated businesses
Expenditure above the AIA falls into writing down allowance pools

Full Expensing (Companies Only)

From April 2023, companies can claim 100% full expensing on new (not second-hand) main rate plant and machinery, with no monetary limit. Special rate assets qualify for a 50% first-year allowance.^[3]

AIA vs Full Expensing: For most small companies, the £1,000,000 AIA is sufficient and also covers second-hand assets. Full expensing becomes relevant for large investments exceeding £1,000,000, or where you want to keep the AIA available for other qualifying expenditure.

Timing Strategies

The timing of asset purchases can significantly affect when you receive tax relief:

Buy Before Your Year End

If you purchase an asset on the last day of your accounting period, you claim the full AIA or full expensing for that period. If you wait one day, you delay relief by up to 12 months.

Example: Your company has a 31 March year end. You buy a £50,000 machine on 31 March 2026. You claim £50,000 AIA in the year ended 31 March 2026, reducing CT by £12,500 (at 25%). If you waited until 1 April, the relief would fall into the year ended 31 March 2027.

Short Accounting Periods

If your accounting period is less than 12 months (e.g., a new company’s first period), the AIA is proportionally reduced. A 6-month period gets a £500,000 AIA.

Matching Allowances to Profit

If profits are high this year, accelerate purchases to maximise deductions
If profits are low (or losses exist), deferring purchases may preserve allowances for a year when they provide a larger tax saving
For companies near the £50,000 small profits threshold, capital allowances can reduce taxable profits below that level — saving Corporation Tax at the marginal effective rate of around 26.5%

Capital Allowances on Cars

Cars have special rules and do not qualify for AIA or full expensing:

CO2 Emissions	Allowance
0 g/km (electric)	100% first-year allowance
1–50 g/km	18% main pool WDA
Over 50 g/km	6% special rate pool WDA

Electric vehicles currently qualify for 100% relief in the year of purchase, making them highly tax-efficient.

Frequently Asked Questions

What qualifies for capital allowances?

Most tangible assets used in your business qualify, including plant and machinery, vehicles, computers, office furniture, and tools. Buildings generally do not qualify (except for Structures and Buildings Allowance at 3%). Land never qualifies.

What is full expensing?

Full expensing allows companies (not sole traders or partnerships) to deduct 100% of the cost of qualifying plant and machinery in the year of purchase, with no monetary cap. It was introduced permanently from April 2023. A 50% first-year allowance applies for special rate assets.

Can sole traders claim the AIA?

Yes. The Annual Investment Allowance of £1,000,000 is available to sole traders, partnerships, and companies. For sole traders, it provides the same 100% first-year deduction for qualifying assets. Full expensing, however, is only available to companies.

When does the purchase date matter?

You can claim capital allowances from the date the asset is acquired and available for use (not necessarily when you pay for it). Buying an asset just before your accounting year end gives immediate relief, whereas buying just after delays relief by up to 12 months.

Sources

Capital allowances — GOV.UK
Annual Investment Allowance — GOV.UK
Full expensing — GOV.UK
Structures and Buildings Allowance — GOV.UK