Definition
Capital allowances are the tax relief a UK business gets when it buys equipment, machinery, vans and other assets it keeps to use in the business, known as plant and machinery. Depreciation in the accounts is not deductible for tax, so capital allowances take its place. Most small companies get 100% relief in the year of purchase through the Annual Investment Allowance, cutting taxable profit and Corporation Tax.
The main allowances
- Annual Investment Allowance (AIA): 100% relief on most plant and machinery, up to £1 million a year. Cars do not qualify.
- Full expensing: 100% relief with no cap for companies buying new and unused main rate plant and machinery (not cars) from 1 April 2023.
- Writing down allowances: a percentage of the remaining cost each year, 14% for the main pool (18% before April 2026) and 6% for the special rate pool. Most cars fall here.
How they are claimed
A company claims on its Company Tax Return (CT600), with a separate capital allowances calculation, and the relief reduces its taxable total profits. A company with £60,000 of profit that buys a £5,000 van and claims AIA is taxed on £55,000. Sole traders claim through Self Assessment, but those using the cash basis can only claim capital allowances on cars.
SmartFiling’s guide to legitimate ways to reduce Corporation Tax shows where capital allowances fit, and its Corporation Tax filing service prepares the computation filed with each CT600.
Related questions
- How is Corporation Tax calculated? It is charged on taxable total profits, after capital allowances, at 19%, 25% or with Marginal Relief in between.
- How can I reduce my company's Corporation Tax legally? Claiming every capital allowance available is one of the most direct ways.
Related terms
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Annual Investment Allowance
The Annual Investment Allowance (AIA) is a capital allowance that gives 100% tax relief on qualifying plant and machinery, such as computers, tools, machinery and vans…
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Taxable total profits
Taxable total profits are the profits on which a UK company pays Corporation Tax for an accounting period.
Read definition -
Corporation Tax
Corporation Tax is the tax UK limited companies pay to HM Revenue and Customs (HMRC) on their taxable profits.
Read definition
