When you buy equipment for your business, you don’t simply deduct the full cost from your profits. Instead, you claim tax relief through a system called capital allowances. This guide explains how capital allowances work, including the valuable Annual Investment Allowance (AIA) and the new rates for April 2026.
For a complete overview of all business expenses, see our guide: Allowable Expenses.
What Are Capital Allowances?
Capital allowances are a form of tax relief that allows you to deduct the cost of certain assets from your taxable profit. The assets must be ‘capital’ assets, meaning they are long-lasting and used for your business. This is different from revenue expenses, which are deducted in full in the year you incur them.
What Assets Qualify?
- Plant and Machinery: This is the main category and includes:
- Computers and IT equipment: Laptops, desktops, servers, printers.
- Office Furniture: Desks, chairs, filing cabinets.
- Equipment: Machinery, tools, specialist business equipment.
- Vehicles: Cars, vans, and lorries. (Cars have special rules; see below).
- Integral Features: Some items that are part of a building, such as electrical systems, heating, and air conditioning.
The Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) is a generous form of capital allowance. It allows you to claim the full cost of most plant and machinery (excluding cars) against your taxable profits in the year of purchase.
The AIA Limit
- Until 31 March 2026: The AIA limit is £1,000,000. This means you can deduct up to £1,000,000 of qualifying expenditure in a single tax year.
- From 1 April 2026: The AIA limit is scheduled to be reduced back to £200,000. This is a significant change and an important consideration for any major equipment purchase planned for 2026-27.
Important: The AIA is available to most businesses, including sole traders and partnerships.
What Qualifies for AIA?
Almost all plant and machinery except cars qualify for the AIA. This includes:
- Computers and IT equipment.
- Office furniture and equipment.
- Business vans and lorries.
- Machinery and tools.
- Some integral features (like air conditioning).
Main Rate Pools and Special Rate Pools
If you claim the AIA, you may still have assets that don’t qualify for the AIA (like cars) or you may have expenditure that exceeds the AIA limit. These assets go into ‘pools’.
1. Main Rate Pool (18%)
Most plant and machinery goes into the main rate pool. You can claim writing-down allowances on these assets at a rate of 18% per year on a reducing balance basis.
2. Special Rate Pool (6%)
The special rate pool includes some items, such as:
- Cars with CO2 emissions over 110g/km.
- Integral features (if not eligible for AIA).
- Long-life assets.
You can claim writing-down allowances on these at a rate of 6% per year.
Cars and Capital Allowances
Cars have special rules. They do not qualify for the AIA. Instead, they are subject to different rates based on their CO2 emissions.
| Car CO2 Emissions | Capital Allowance Rate |
|---|---|
| 0-50 g/km | 100% (included in main pool, eligible for a 100% allowance in the first year) |
| 51-110 g/km | 18% (main pool) |
| Over 110 g/km | 6% (special rate pool) |
Note: The rules for cars are complex and subject to change. It’s essential to get specific advice for your vehicle.
Example: Buying a Laptop
Let’s say you buy a new laptop for £2,000 in the 2025-26 tax year.
- The laptop qualifies for the AIA.
- You can claim the full £2,000 as a capital allowance.
- Your taxable profit is reduced by £2,000, saving you tax at your marginal rate (e.g., 20% = £400 tax saving).
What Happens When You Sell an Asset?
When you sell an asset you’ve claimed capital allowances on, you may have to pay a tax charge called a ‘balancing charge’ if you sell it for more than its tax-written down value.
Cash Basis vs Traditional Accounting
The way you claim capital allowances is different depending on whether you use the Cash Basis vs Traditional Accounting.
- Cash Basis: You can claim the cost of plant and machinery (excluding cars) as an expense in the year of purchase instead of claiming capital allowances. From April 2024, this applies to all plant and machinery purchases (with a cap of £1,000,000 for the first year of the cash basis), and there is no limit on the cost of assets you can claim.
- Traditional Accounting (Accruals Basis): You claim capital allowances as described above.
How We Can Help
Capital allowances can be complex, especially with the changing AIA limits and the special rules for cars. Our ACCA-qualified accountants can:
- Advise you on the most tax-efficient way to purchase equipment.
- Calculate your optimal capital allowances claim.
- Ensure you benefit from the AIA where possible.
- Help you plan your purchases around the April 2026 AIA reduction.
Maximise your capital allowances with expert advice.
📚 Related Guides
• Self-Employed Allowable Expenses
• Cash Basis vs Traditional Accounting
• Mileage Claims for Self-Employed
• Record Keeping for Self-Employed
• Home Office Expenses
• Self-Employed Tax Return Checklist
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