Capital allowances – how it works
Capital allowances – how it works
Capital allowances are used by the Government to boost business investment by permitting businesses to deduct the cost of qualifying capital expenses from their taxable profits.
Changes to the capital allowances regime were announced in the 2025 Autumn Budget. The Government is keeping its promise to maintain full expensing for capital expenditure on plant and machinery, as well as the permanent Annual Investment Allowance (AIA), to attract new investment. Businesses should make sure to keep up with the changes and look to make the most of these incentives.
What are the capital allowances?
There are three kinds of capital allowances – the Annual Investment Allowance, the First Year Allowance, and the Writing-Down Allowance.
The Annual Investment Allowance (AIA) gives 100% relief for up to £1m of qualifying plant and machinery in the tax year of purchase.
The First Year Allowance (FYA), also known as 'full expensing', gives 100% relief on expenditure incurred after 31 March 2023. Special rate expenditure (e.g. integral features and long life assets) qualifies for a 50% FYA.
As of 1 January 2026, a permanent 40% FYA applies to capital expenditure on assets for leasing and for unincorporated businesses, which were previously excluded from the more generous full expensing allowances. First Year Allowances continue to exclude cars, second-hand assets and assets acquired for overseas leasing.
You can claim both AIA and FYA, as long as it is not on the same expenditure. Writing down allowances (WDA) are at 14% from April 2026 (reduced from 18%). WDAs let you deduct 14% of the value of certain items from your profits each year.
Who can claim capital allowances?
Only companies can claim full expensing and 50% FYAs.
All kinds of businesses can claim AIA and WDA. However, if you’re a sole trader or partnership, you may be able to use a simpler system called cash basis instead.
What investments qualify for capital allowances?
You can claim the AIA on most plant and machinery, apart from cars.
Full expensing and 50% FYAs can be claimed on new and unused plant and machinery. There is also an enhanced capital allowance available for electric cars or cars with zero CO2 emissions and expenditure on plant and machinery for electric vehicle charge points until 31 March 2027 for corporation tax purposes or 5 April 2027 for income tax purposes.
You can claim WDA if your plant and machinery do not qualify for FYA or AIA, or if you have already claimed the maximum amount.
How much tax relief can you get?
Both AIA and FYA give relief at 100% of the qualifying cost, compared to the WDA of 14% from April 2026 (reduced from 18%).
The table below shows the effective rates of relief for the different claims. However, you will need to compile your capital allowance claims for each year with care to make sure that your business gets the optimal overall benefit.
| Asset class | CA claim | Asset type | CA rate | Effective relief of cost in year 1 for company |
| Main plant and machinery | FYA | New | 100% | 25 % |
| FYA | New assets for leasing and for unincorporated businesses | 40% | 10% – from 1 January 2026 | |
| AIA (max £1m) | All | 100% | 25% | |
| Main pool - WDA | Second hand | 14% 18% |
3.5% – from April 2026 4.5% - pre April 2026 expenditure |
|
| Special Rate (generally Long Life assets or integral features) | FYA | New | 50% | 12.5% |
| AIA (max £1m) | All | 100% | 25% | |
| Pool - WDA | Second hand | 6% | 1.5% |
How much can we invest under the Annual Investment Allowance and First Year Allowances?
The AIA is capped at £1m per year. However, unlike the AIA, there is no limit on the amount of capital investment that can qualify for FYAs.
Super deduction, Special Rate allowance and disposals?
There were special rules for disposals when enhanced first-year allowances were claimed for expenditure incurred by companies in the period 1 April 2021 to 31 March 2023. These were known as the super-deduction and the Special Rate allowance.
The disposal values for plant and machinery claimed as either the super deduction or SR allowance are determined in accordance with the Capital Allowances Act 2001.
When the asset is sold the amounts incurred on plant claimed as either 'super-deduction' or 'SR allowance' is automatically a balancing charge. The main and special rate pools are not adjusted for the FYA disposal values. For disposals after 1 April 2023, then the charge is subject to 25% corporation tax rate - the original relief was given against the previous 19% corporation tax rate.
Therefore, even though assets that were claimed as either super deduction or SR allowance do not enter the main or special rate pool at purchase, businesses must track all super-deduction and SR allowance assets until they are disposed of to ensure that the correct disposal value and balancing charge is applied. This also applies to expenditure eligible as full expensing including the 100% FYA and 50% special rate full expensing. (Note this does not apply to expenditure eligible for the 40% first year allowance).
It is important to note that it is possible to use a CAA 2001 s198 election as an alternative disposal value for fixtures that qualified and are claimed as first year allowances. For sellers of fixtures that have been claimed as first year allowances, the balancing charge realised would be heavily mitigated - potentially as low as £1 or £2, or lower still where only part of the cost of the plant and machinery has been claimed under first year allowances.
What about losses and the annual investment allowance and first year allowances?
As with all capital allowances, if the full deduction cannot be used by the business to set against its profits, a loss will be created which can be carried forward. It is also possible for all or part of the allowances to be disclaimed (so that the balance goes into the main pool to carry forward to future years), but this is unlikely to be the most tax-efficient option.
Get in touch with our Capital Allowances specialists
Have you got questions about your past or future capital allowances claims? Our tax experts can advise you on how to optimise your investments and claims.