Capital Allowances and Tax Relief on Business Purchases

Buy the same £45,000 car on the same day, through the same company, and the tax relief you get in year one can differ by more than £10,500 depending on nothing more than what's written on the V5C logbook. An electric version frees up over £11,000 of tax relief immediately. A petrol or diesel version frees up a few hundred pounds, with the rest trickling out over more than a decade. Same spend. Wildly different outcome.

That's capital allowances in a nutshell — a system that rewards precision. Get the category right, and a purchase can wipe a meaningful chunk off your corporation tax bill in the very year you make it. Get it wrong, or simply not think about it at all, and the same spend sits relieved at a crawl over many years instead. I've watched directors make five-figure purchasing decisions without a moment's thought for which allowance applies, and I've watched other directors save thousands simply by timing a purchase a few weeks differently. This guide is about making sure you're in the second group.

What Are Capital Allowances?

Why Capital Allowances Replace Depreciation

Your company's accounts show depreciation on assets you own — a sensible accounting concept, but not one HMRC recognises for tax purposes. Instead, the tax system uses its own framework, capital allowances, to work out how much of an asset's cost can be deducted from taxable profit, and over what timeframe. The two numbers — your accounting depreciation and your tax capital allowances — are almost never the same figure, which is exactly why your corporation tax computation makes an adjustment between them every year.

The Pools System

Most qualifying assets are grouped into "pools" for tax purposes — principally the main pool and the special rate pool — with allowances calculated on the pooled balance each year rather than asset by asset. Certain categories, notably cars above a certain emissions threshold, sit in the special rate pool, relieved more slowly than the main pool.

What Qualifies as Plant and Machinery

The category is broader than the name suggests. Computers, office furniture, tools, certain fixtures integral to a building, and yes, actual machinery, all typically qualify. Buildings themselves generally don't, though integral features within them — heating, electrical systems, lifts — often do.

Annual Investment Allowance – £1 Million

How the AIA Works

The Annual Investment Allowance lets you deduct the full cost of qualifying plant and machinery purchases, up to £1 million a year, in the very year you buy them — rather than spreading the relief over many years through the pooled writing-down system.

What It Covers

Almost anything a typical trading company buys as equipment falls within the AIA — computers, machinery, office furniture, tools, vans. Cars are the notable exclusion, treated entirely separately under their own rules, covered later in this guide.

Why £1 Million Is Enough for Most Companies

For the overwhelming majority of small and medium-sized companies, the £1 million limit is never remotely close to being tested in a single year — which means, in practice, that most qualifying purchases get full, immediate relief without needing to think about pooling, writing-down allowances, or any of the more complex mechanics at all.

Full Expensing for Limited Companies

100% Relief, No Cap

Full expensing gives limited companies a 100% first-year deduction on new, unused, qualifying main-rate plant and machinery, with no annual cap at all — a permanent relief introduced specifically for companies, sitting alongside the AIA rather than replacing it.

Full Expensing vs AIA – Do You Need Both?

For most companies spending well under £1 million a year, the AIA alone already delivers 100% relief, making full expensing largely academic day to day. Its real value shows up for larger companies, or in an exceptional year of significant capital investment that genuinely exceeds the £1 million AIA ceiling — full expensing simply keeps the 100% relief flowing beyond that point.

The New 40% First-Year Allowance

From January 2026, a new 40% first-year allowance became available on qualifying new main-pool plant and machinery. It's aimed principally at businesses that can't access full expensing — leasing and hire businesses, unincorporated businesses — and, for most limited companies, will rarely beat a straightforward AIA claim. Where it does matter is once your AIA has already been used up in a given year, or on assets that don't qualify for it: the 40% allowance is a genuinely useful fallback in that scenario, relieving less than full expensing, but considerably more than the standard writing-down rate.

The Main Pool Rate Drop to 14%

Here's a change worth knowing about even if it rarely bites directly: from April 2026, the standard writing-down allowance for the main pool dropped from 18% to 14%. It only affects spending that falls outside the AIA, full expensing, and the new 40% allowance — most commonly, older brought-forward pool balances from previous years, or cars, which we cover next. For a typical company claiming AIA in full each year, this change makes little practical difference. For a company with a significant main pool balance built up over time, or one relying on cars in that pool, it means relief now trickles through more slowly than it used to.

Capital Allowances on Computers and Equipment

Typically Covered by the AIA in Full

Laptops, monitors, servers, office furniture and general equipment used in the business are squarely within AIA territory, meaning the entire cost is almost always deducted in full in the year of purchase for a typical small or medium-sized company.

What Happens Once You've Used Your AIA

In the rare event your company has genuinely used its full £1 million AIA in a year, further qualifying equipment purchases fall back on full expensing (100%, no cap, for companies) or the 40% first-year allowance where full expensing doesn't apply — either way, still considerably better than the standard 14% writing-down rate.

Software and Intangibles

Off-the-shelf software is generally treated as qualifying for capital allowances in the same way as physical equipment. Bespoke software development costs sit in slightly different territory, sometimes treated as an intangible asset rather than plant and machinery — worth flagging to us specifically if your company is investing significantly in custom-built systems, since the tax treatment can vary.

Capital Allowances on Cars

Why Cars Are Treated Differently

Cars are deliberately excluded from the AIA, full expensing, and the new 40% first-year allowance, because HMRC takes the view that a car almost always carries an element of personal use, even when it's genuinely a company asset — so the system doesn't hand out an automatic, immediate full write-off the way it does for equipment used purely for business.

The Three CO2 Bands

Instead, cars fall into one of three categories based on their CO2 emissions. New and unused fully electric or hydrogen cars, with 0g/km emissions, qualify for a 100% first-year allowance — full relief immediately, just like equipment. Cars emitting up to 50g/km that don't qualify for that first-year allowance, including second-hand electric cars, sit in the main pool at the new 14% rate. Anything above 50g/km sits in the special rate pool, relieved at just 6% a year.

A Worked Comparison

Take a company buying a £45,000 car. Go electric, and the 100% first-year allowance frees up the entire cost against taxable profit immediately — over £11,000 of corporation tax relief at the main rate in year one alone. Choose a petrol or diesel equivalent instead, sitting in the special rate pool at 6%, and year one delivers a few hundred pounds of relief, with the remaining balance dribbling out slowly over well over a decade. It's not a marginal difference between two similar options — it's one of the starkest contrasts anywhere in the tax system, and it's exactly why we walk every client through this before they sign for a new company vehicle, not after.

Electric Cars and 100% First-Year Allowances

The 100% Relief, Explained

A new, unused, fully electric car bought by your company qualifies for a 100% first-year allowance — the entire purchase cost deducted against taxable profit in the year of purchase, exactly as if it were ordinary equipment covered by the AIA.

The Deadline Worth Knowing

This particular relief isn't permanent in the way the AIA and full expensing are. It's currently confirmed to run until 31 March 2027 for corporation tax purposes, so if fleet electrification is on your company's roadmap in the next couple of years, there's a genuine reason to bring the decision forward rather than leave it open-ended.

Combining This With the Benefit-in-Kind Savings

This capital allowance sits alongside the dramatically lower Benefit-in-Kind rate electric cars also attract for the director personally — 4% for 2026/27, against up to 37% for a comparable petrol or diesel car, as we cover in our dedicated guide on company cars and mileage. Put the two together, and an electric company car purchase is currently one of the most tax-efficient decisions available to a profitable limited company, on both the company side and the personal side at once.

Should My Company Buy or Lease Equipment?

Buying: Capital Allowances vs Cash Flow

Buying an asset outright lets your company claim capital allowances directly, often at 100% through the AIA, but it ties up cash in one lump sum, which matters more for some businesses than others.

Leasing: Simpler, but Different Relief

Lease an asset instead, and your company generally can't claim capital allowances on it at all — the lease payments themselves are simply deducted as an ordinary business expense as they're paid, spreading the tax relief evenly across the lease term rather than front-loading it.

Which Suits Your Company

There's no universal right answer. A company with strong cash reserves and a genuine appetite to own the asset long-term usually does better buying outright and claiming allowances upfront. A company that prefers to preserve cash flow, or that replaces equipment frequently and doesn't want the hassle of managing a fleet of owned assets, often does better leasing, accepting slightly less favourable tax treatment in exchange for spreading the cost and avoiding a large upfront outlay. It's a decision worth running past us before a significant purchase, particularly for cars, where the gap between the best and worst tax outcome is genuinely enormous.

Capital allowances reward planning far more than they reward good luck. The difference between claiming the right relief and defaulting to the slowest available option can run into thousands of pounds on a single significant purchase. If you're planning equipment spending, a new vehicle, or simply want to check what your company is currently claiming, get in touch with the team at Cannon Accountants before you commit to the purchase, not after.

This guide sits alongside our detailed look at company cars and mileage, and it's one piece of the full picture covered in our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

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Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.