Capital Allowances: A Practical Guide for UK Accountants
Capital allowances give tax relief on business asset purchases. This guide covers the Annual Investment Allowance, full expensing, writing down allowances, and the special rate pool.
Capital allowances are where most UK businesses claim significant tax relief — and where many underclaim because they don't identify qualifying assets correctly. Understanding the system thoroughly can make a material difference to a company's current-year tax bill.
Why Capital Allowances Exist
Accounting depreciation charges costs over an asset's useful life using the entity's own judgement. For tax, HMRC uses a standardised system — capital allowances — that determines the timing and rate of tax relief. Depreciation is always added back when computing taxable profit; capital allowances are substituted in.
Annual Investment Allowance (AIA)
The AIA gives 100% first-year tax relief on qualifying plant and machinery up to £1 million per year. For most SMEs, the AIA means the entire capital expenditure can be deducted in the year of purchase. The AIA applies to most plant and machinery but not cars, buildings, or structures.
Full Expensing
Full expensing — effective April 2023 and made permanent in the 2024 Autumn Statement — gives 100% first-year relief on qualifying new main-rate plant and machinery purchased by companies. Unlike AIA, full expensing has no monetary cap. Special rate assets (long-life assets, integral features) qualify for a 50% first-year allowance instead.
Writing Down Allowances
Assets not covered by AIA or full expensing enter one of two pools. The main pool attracts 18% WDA on a reducing balance basis. The special rate pool attracts 6% WDA — this applies to long-life assets (25+ year life), thermal insulation, and integral features of buildings (electrical systems, heating and cooling, lifts, water systems). Choosing correctly between main and special rate pool is a significant planning point.
Structures and Buildings Allowance (SBA)
The SBA gives 3% straight-line relief on the cost of constructing or renovating commercial buildings. It does not apply to land. The allowance follows the building — a purchaser of a commercial property takes over the original owner's SBA entitlement.
Further Reading
Study with Learnsignal: Tax CPD for qualified accountants. Browse CPD.
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