Capital allowances explained

How capital allowances work

1. Identify qualifying assets. Tools, machinery, computers, vans and equipment used in the business.
2. Use the annual investment allowance. Claim 100% of the cost, up to £1 million a year, against your profit.
3. Consider full expensing. Companies can claim 100% relief on qualifying new plant and machinery, with no annual cap.
4. Use writing down allowances for the rest. Assets outside the above are relieved gradually, at 14% or 6% a year depending on the pool. The main pool rate dropped from 18% to 14% in April 2026.

The 40% first year allowance, new from January 2026

This one is easy to miss because it arrived part way through the year. For plant or machinery bought on or after 1 January 2026, there is a 40% first year allowance. You deduct 40% of the cost from your profits straight away, and then claim writing down allowances on the remaining 60% from the next accounting period onwards.

To qualify, the asset must be new and unused, must qualify for the main rate of writing down allowance, and must not be a car.

It sits alongside the annual investment allowance and full expensing rather than replacing them. In practice the annual investment allowance still gives 100% relief on the first £1,000,000 of qualifying spend, so the 40% allowance matters most where that limit is already used up, or where an asset does not qualify for the other reliefs. Which route is best depends on your figures, and it is worth checking rather than assuming.

Why it matters

Claimed properly, capital allowances can wipe out a large slice of your tax in the year you invest. Missed or mispooled, they quietly cost you. Cars, integral building features and second hand assets each have their own rules, which is where expert help pays for itself.

The four routes, and who can use each

Capital allowances are how you get tax relief on assets you buy for the business. There are now four main routes and they do not all apply to everyone, which is where the confusion starts.

• Annual Investment Allowance. 100% relief on up to £1,000,000 of qualifying plant and machinery a year. Permanent at that level. Available to companies and unincorporated businesses alike, and it covers second hand assets as well as new.
• Full expensing. 100% relief on main rate plant and machinery, uncapped. Companies only, and the asset must be new and unused.
• 50% first year allowance. For special rate assets such as integral features and long life items. Companies only, new and unused, with the balance going to the special rate pool.
• The 40% first year allowance. New, from 1 January 2026. 40% on new and unused main rate plant and machinery, and crucially this one is available to unincorporated businesses and to leasing providers.

Why the 40% allowance matters more than it looks

Full expensing has always excluded assets bought for leasing to others, which shut leasing businesses out of the most generous relief entirely. The 40% allowance is the route that opens for them, and for sole traders and partnerships who could never use full expensing in the first place.

It excludes second hand assets, cars, and overseas leasing. For most small businesses the Annual Investment Allowance at 100% is still better, because £1,000,000 a year covers everything they will ever buy. The 40% allowance matters at the point you exceed the Annual Investment Allowance, or where the asset is being leased out.

The writing down allowance has been cut

This is the change most likely to affect your numbers and it has had very little attention.

The main pool writing down allowance fell from 18% to 14%, from 1 April 2026 for companies and 6 April 2026 for sole traders and partnerships. The special rate pool stays at 6%.

Writing down allowances are given on a reducing balance, so a lower rate does not reduce the total relief, it slows it down. On a £50,000 main pool, the first year's allowance drops from £9,000 to £7,000. Over a few years that is a real cash flow difference, and it makes using the Annual Investment Allowance in the year of purchase more valuable than it was.

Where a chargeable period straddles the commencement date, a hybrid rate applies for that period.

Cars, which follow their own rules

Cars never qualify for the Annual Investment Allowance, full expensing or the 40% allowance. They go into a pool and attract writing down allowances at a rate driven by their CO2 emissions, with the lowest emission vehicles treated most generously.

If you are self employed there is a further choice: claim capital allowances on the car, or claim the flat rate mileage of 55p a mile for the first 10,000 business miles and 25p above. You cannot do both on the same vehicle, and the choice is effectively made the first time you claim.

How cash basis changes the picture

If you are a sole trader or partnership using cash basis, which has been the default since 2024/25, most equipment is simply deducted as an ordinary business expense when you pay for it, rather than through capital allowances at all.

The exclusions matter: cars, land and buildings, assets with a useful life over 20 years, and financial assets stay outside that treatment. So for most cash basis businesses, capital allowances now only really come up in relation to cars.

Getting the order right

Where you have a large capital spend, the sequence usually worth considering is: use the Annual Investment Allowance first, because it is 100% and covers second hand assets. If you are a company and have exhausted it on other things, look at full expensing for new main rate assets. If you are unincorporated or leasing out, the 40% allowance is the one available to you. Whatever is left goes into the pools at 14% or 6%.

Timing is worth a thought too. An asset bought a day either side of your year end lands in a different period, and with the writing down rate falling, the year in which relief starts now matters more than it used to.

Frequently asked questions