Capitals allowances are a tax adjustment to the profit of a business and are taken off the profit before any tax is calculated. Capital allowances are formed of the costs of any capital purchases, such as plant & machinery, and allow businesses to claim the tax relief on these costs.
The UK has various capital allowances that are available to businesses and understanding them is key to making sure you are running your business efficiently for tax.
For many businesses the most beneficial capital allowance is the annual investment allowance, also known as AIA. The AIA is available to both sole trader and limited companies and allows a business to deduct the full costs of any capital purchase in the year they are incurred. There is an annual limit of £1 million for qualifying assets, although most will never reach this limit so there is rarely a concern. There are a few other restrictions that need to be followed to work out if a purchase qualified for AIA, such are cars which are excluded, but in general AIA will be sufficient for most businesses.
Should a business use up the annual AIA limit they can then look to use “full expensing”, which allows up to 100% of the cost to be offset against profits. Unlike AIA full expensing does come with some strict rules on what purchases qualify. For instance, you can only claim 100% relief on new or unused plant & machinery.
While this relief does sound generous, and for some businesses no different from AIA as the restrictions wouldn’t impact them, there are some significant draw backs. For a start unincorporated businesses cannot claim full expensing. There are also various exclusions that will stop you from making the most of the relief. For instance, assets bought for leasing or bought second hand aren’t eligible for the relief.
Along with these HMRC are introducing a new allowance from 1 January 2026, the new allowance will allow businesses to claim 40% of the costs in the year with the remaining 60% eligible for the writing down allowances.
The bigger win on the new allowance is that all businesses are eligible to claim it, both incorporated and unincorporated, as well as assets for UK leasing are eligible. Although some of the exclusions are still present, as such are second hand assets and cars.
For most businesses the AIA will be the most used and will provide sufficient allowances. However, if your concerned you might exceed the £1 million limit or would like further information please get in touch with us.
