Capital allowances: the Annual Investment Allowance and full expensing

Capital allowances are tax relief that lets you deduct some or all of the value of an item from your profits before you pay tax. They apply to assets you keep to use in the business, which the tax rules call plant and machinery, rather than to everyday running costs.

That covers equipment, machinery and business vehicles such as vans, lorries or cars, plus some features of buildings, including lifts, heating systems and electrical installations. You must own the asset, which is why the way you pay for it matters. We cover that further down.

GOV.UK lists several allowances, and the main ones today are the Annual Investment Allowance, full expensing, a 40% first-year allowance and writing down allowances. Which one you use depends on the asset, when you bought it and whether you are a company.

You cannot claim more than one allowance against the same expenditure, and you do not have to claim the full amount available. You can take part of the AIA and use another allowance for the rest.

The Annual Investment Allowance lets you deduct the full value of qualifying plant and machinery from your profits before tax, up to £1 million a year. The £1 million level has applied since 1 January 2019 to sole traders, partnerships and limited companies alike.

• AIA is available to partnerships only where all the members are individuals.
• You cannot claim AIA on business cars, on items you owned for another reason before you began using them in the business, or on items given to you or your business.
• If you spend more than the limit, you can claim first-year allowances or writing down allowances on the excess.
• If the AIA changed during your accounting period, you must adjust the amount you claim, and a short accounting period reduces the limit in proportion. GOV.UK gives the example of a nine-month period giving £750,000.

Most small and medium-sized businesses never reach £1 million of qualifying spend, which is why the AIA is the allowance they meet most often.

Full expensing is a 100% first-year allowance on main rate plant and machinery for companies, with no upper limit. It was introduced for expenditure from 1 April 2023 and made permanent in legislation announced in November 2023.

It is for companies within the charge to Corporation Tax only, so sole traders and partnerships cannot use it. Companies can also claim a 50% first-year allowance on special rate spending, which includes items such as integral features and long-life assets. The assets must be new and unused, and items bought to lease to others are normally excluded.

The relief comes with extra record keeping. If you later sell an asset on which you claimed full expensing, you work out a balancing charge on disposal, which recovers some of the relief claimed. Plan any sale with your accountant before you complete it.

The 40% first-year allowance lets you deduct 40% of the cost of qualifying plant or machinery in the year you buy it. The asset must have been bought on or after 1 January 2026, be new and unused, qualify for the main rate of writing down allowance and not be a car.

In the next accounting period you can claim writing down allowances on the remaining 60% of the cost. It matters most to businesses that cannot use full expensing, such as unincorporated businesses and those buying assets to lease out.

Items you keep for use in the business qualify, but things you lease generally do not. GOV.UK says you can claim on equipment, machinery, business vehicles and certain fixtures such as fitted kitchens and bathroom suites, plus the cost of building alterations needed to install equipment.

Repairs are not capital allowances. They are treated as ordinary business expenses. Sole traders and partnerships using the cash basis can only claim capital allowances on business cars.

Yes, because you generally must own the asset to claim. A hire purchase agreement counts: HMRC treats the person making the payments as the owner, so you can claim even before the last instalment. A plain lease generally does not.

That is why the structure of a deal matters. Our guide to what hire purchase is explains how ownership passes, and our asset finance guide covers the wider options. For vans, see van finance. Ask your accountant how a specific agreement will be treated before you sign.

You claim on your tax return, through Self Assessment for sole traders and partnerships or the Corporation Tax return for companies. Keep records of what you bought, when and for how much, because an incorrect claim can lead to an HMRC enquiry and relief being withdrawn.

Accounting for the allowance, the pool it falls into and any later disposal is a job for an accountant. The cash flow forecast should also show when the tax saving actually reaches you, which is when the return is filed and the tax calculated, not the day you buy the equipment.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not advise on capital allowances or tax. We can introduce businesses to lenders that offer equipment and vehicle finance.

If you are planning an equipment purchase, you can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.