What is Capital Allowance? A Guide for UK Businesses

Minimising tax liabilities is a key concern for UK businesses, and capital allowances provide a valuable way to reduce taxable profits legally. These allowances enable businesses to claim tax relief on qualifying capital expenditures, effectively lowering their overall tax bill. But what exactly are capital allowances, and how do they work?

In this guide, we will explore:

• What capital allowances are and how they work
• The different types of capital allowances available
• Which business assets qualify for tax relief
• How to claim capital allowances effectively

By understanding capital allowances, your business can optimise tax efficiency and reinvest savings into growth. Let’s break it down step by step.

What is Capital Allowance?

Capital allowance is a form of tax relief that allows businesses to deduct the cost of qualifying assets from their profits before calculating Corporation Tax or Income Tax. Instead of claiming the full cost in one year, businesses typically spread the deduction over several years, reflecting the asset’s use over time.

For example, if a company purchases machinery for £10,000, it may be able to claim capital allowances to reduce its taxable profit, ultimately lowering its tax liability.

For further details, refer to HMRC’s Capital Allowances Guide.

Who Can Claim Capital Allowances?

Capital allowances are available to businesses that invest in qualifying assets for commercial use. They provide tax relief by allowing a portion of the asset’s cost to be deducted from taxable profits. You may be eligible to claim capital allowances if you are:

• A limited company – Companies subject to Corporation Tax can claim capital allowances on qualifying capital expenditures, reducing their taxable profits.
• A sole trader or partnership – Businesses operating as sole traders or partnerships can claim capital allowances against their Income Tax liabilities.
• A business using equipment or property for commercial activities – If your business purchases assets such as machinery, vehicles, or office equipment for operational use, these may qualify for capital allowances.

However, capital allowances are not available to employees or landlords unless the property is used specifically for business purposes, such as furnished holiday lettings or properties held within a company structure.

Understanding whether you qualify for capital allowances is crucial to maximising tax efficiency and ensuring compliance with HMRC regulations.

What Types of Capital Allowances Can You Claim?

There are several types of capital allowances, each designed to provide tax relief for different types of business expenditure. Understanding these categories can help businesses maximise their tax efficiency.

Annual Investment Allowance (AIA) – Up to £1 Million Deduction

The Annual Investment Allowance (AIA) allows businesses to deduct 100% of the cost of qualifying assets from their taxable profits, up to a £1 million limit per year. This provides an immediate tax-saving opportunity rather than spreading deductions over multiple years.

Key features of AIA:

• Covers most machinery, equipment, and commercial vehicles (excluding cars).
• Can be claimed in full in the year of purchase, accelerating tax relief.
• Does not apply to buildings, land, or cars.

For further details, refer to HMRC’s guidance on the Annual Investment Allowance (AIA).

Writing Down Allowance (WDA) – Spreading the Cost Over Time

If your business exceeds the £1 million AIA limit or purchases assets that do not qualify for AIA, you can claim Writing Down Allowances (WDA) instead. These allowances allow businesses to deduct a percentage of an asset’s value from their taxable profits each year, spreading tax relief over time.

Standard WDA Rates:

• 18% per year for main rate assets, including most machinery, equipment, and business vehicles.
• 6% per year for special rate assets, such as integral features in buildings (e.g. heating systems, lifts, and electrical work) and long-life assets.

When to Use WDA:

• Ideal for long-term business assets that do not qualify for full AIA relief.
• Particularly useful for commercial property improvements, as these often fall under the special rate category.

Claiming WDA ensures your business continues to benefit from tax relief, even when AIA is fully utilised or unavailable for certain assets.

First-Year Allowances (FYA) – 100% Tax Relief for Energy-Efficient Assets

The First-Year Allowance (FYA) provides businesses with the opportunity to claim 100% tax relief on the cost of qualifying energy-efficient and environmentally friendly assets. This allowance is designed to encourage businesses to invest in sustainable practices by offering immediate tax deductions.

Key Features of FYA:

• Covers electric cars, low-emission vehicles, and a range of energy-efficient equipment.
• Can be claimed in full in the year of purchase, making it an attractive option for businesses looking to reduce tax liabilities in the short term.
• Ideal for businesses prioritising eco-friendly investments as part of their sustainability goals.

For more details on eligible assets, refer to the First-Year Allowances Guide provided by HMRC.

Super Deduction (Previously Available Until April 2023)

The Super Deduction allowed companies to claim 130% capital allowances on qualifying investments in new plant and machinery, offering a significant boost to businesses looking to make capital purchases. This scheme was available until April 2023, and while it has now ended, businesses may still be able to benefit from investments made before the deadline.

Key Features of Super Deduction:

• Enabled companies to claim 130% of the cost of qualifying assets, leading to a larger upfront tax saving.
• Applied to investments in new plant and machinery, such as equipment and machinery that were used for business purposes.
• Though the scheme has concluded, businesses that made qualifying purchases before the deadline may still be able to claim the relief.

For further details, refer to HMRC’s Super Deduction Explained page to understand the eligibility and claim process.