Capital allowances are the UK tax mechanism that lets businesses deduct the cost of equipment, machinery, and certain other capital assets from taxable profits. The Annual Investment Allowance (AIA) gives 100% relief on the first £1 million per year; Full Expensing gives 100% relief on most new plant for companies.

Used well, capital allowances can substantially reduce the tax bill in the year of asset purchase. A year-end review of capital spend is one of the highest-leverage planning steps for SMEs.

Why capital allowances exist

The accounting profit shown in a company''s P&L includes depreciation — a non-cash charge that spreads the cost of capital assets over their useful life.

HMRC doesn''t accept accounting depreciation for tax purposes. Instead, it offers a parallel system — capital allowances — that gives tax relief on a different (often faster) schedule. The starting point of every Corporation Tax computation: add back the accounting depreciation, subtract the capital allowances.

The five main allowances

1. Annual Investment Allowance (AIA)

• What it covers: most plant and machinery, including computers, vehicles other than cars, equipment, fixtures and fittings.
• The benefit: 100% deduction in the year of purchase.
• The cap: £1 million per year, per group (with associated companies sharing one cap).
• Who can claim: sole traders, partnerships, companies.

For most SMEs, AIA covers virtually all qualifying equipment spend each year. The £1m cap is rarely hit.

2. Full Expensing

• What it covers: most NEW plant and machinery (used / second-hand assets don''t qualify).
• The benefit: 100% deduction in the year of purchase, no cap.
• Plus 50% First-Year Allowance: for assets in the Special Rate Pool (integral features) at 50% in year 1.
• Who can claim: limited companies only — NOT available to sole traders, partnerships, or LLPs.

Introduced in 2023, made permanent in 2024. Useful for companies that exceed the £1m AIA limit (otherwise AIA gives the same outcome more flexibly).

3. Special Rate Pool (SRP)

• What it covers: integral features (electrical, heating, ventilation, lifts, air conditioning), long-life assets (over 25 years expected economic life), and thermal insulation in buildings.
• The benefit: 6% reducing balance writing-down allowance per year — slower than AIA.
• When it matters: when AIA has been used up, or for second-hand integral features that don''t qualify for Full Expensing.

4. Structures and Buildings Allowance (SBA)

• What it covers: cost of constructing or refurbishing commercial buildings.
• The benefit: 3% straight-line writing-down allowance per year.
• What''s included: construction costs, professional fees, demolition costs, land remediation. Land itself is not included.
• Who can claim: anyone owning a qualifying interest in the building, used in a qualifying activity (most commercial uses).

SBA was introduced in 2018, so it''s relatively new and underused. If your company has built or refurbished commercial premises since 2018, check whether SBA was claimed — it''s easy to miss.

5. Research and Development Allowances (RDA)

• What it covers: capital spend on R&D — equipment, buildings used in R&D activities.
• The benefit: 100% first-year allowance.

Distinct from R&D tax relief (which covers operating costs); both can apply to the same business.

What''s NOT a capital allowance

• Cars: cars get a different writing-down allowance regime, based on CO2 emissions. Most cars get the main rate (18%) or SRP rate (6%); zero-emission cars get 100% First-Year Allowance.
• Buildings (other than SBA): the structure of a building is not eligible for AIA or Full Expensing — only SBA at 3%.
• Land: never a capital allowance.
• Intangibles (goodwill, IP): separate Corporate Intangibles Regime, not capital allowances.

Planning levers

Time your purchases

If you''re close to year-end and the company is profitable, accelerating a planned capital purchase into the current period saves tax this year (rather than next). Conversely, deferring purchases out of a low-profit year and into a high-profit year can be efficient.

Allocate AIA strategically

If you have a mix of main-pool and special-rate assets, allocate AIA to the special-rate items first — they''d otherwise only get 6% relief per year, vs main-pool at 18%. Allocate AIA to the highest-value, slowest-relief assets.

Watch the small pools

Once a writing-down pool is below £1,000, you can write off the whole balance in one year as a "small pools allowance". Useful for cleaning up old fixed asset registers.

Consider Full Expensing vs AIA

For new plant under the £1m AIA cap, AIA and Full Expensing give the same 100% deduction. AIA is more flexible (covers used assets, available to non-companies). Full Expensing matters when you''re exceeding £1m.

Research and Development Allowances + R&D tax relief

If your R&D activity involves capital purchase, claim RDA on the capital spend and R&D tax relief on the operating R&D costs. They''re separate and can be claimed for the same project.

Common mistakes

• Missing the integral features split: when refurbishing premises, the integral features (electrical, plumbing, HVAC) often go into the special rate pool. They''re easy to lump into accounting depreciation and not claim properly.
• Not claiming SBA on construction: many SMEs that built or refurbished commercial premises since 2018 never set up the SBA claim.
• Ignoring small pool writes-offs: balances under £1,000 sit on the books for years gaining 6-18% relief annually when they could be cleared.
• Cars in the main pool: cars are not main-pool plant. Common bookkeeping error.

What to do this year

• Two months before year-end: review capital spend year-to-date and forecast remaining purchases. If you have capacity in AIA and the cash, accelerating planned purchases saves tax.
• At year-end: have your accountant produce the capital allowances schedule showing AIA / Full Expensing / SRP / main pool allocations. Verify the integral features split on any refurbishment.
• Annually: review old fixed assets to clear small pools and dispose of items no longer in use.