Capital allowances let a company deduct some or all of the value of plant and machinery, such as equipment, machinery and business vehicles, from its profits before Corporation Tax is charged. [1] The main rate for non-ring fence profits is 25% for profits above £250,000, the small profits rate of 19% applies to companies with profits of £50,000 or less, and marginal relief applies to profits between the two. [2] Only companies can claim full expensing and the 50% first-year allowance.
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How capital allowances reduce a company's Corporation Tax
A company that buys equipment, machinery or business vehicles can deduct some or all of their value from its profits before paying tax, through capital allowances. [1] The items covered are known together as plant and machinery, and the deduction lowers the profit that Corporation Tax is charged on.
Whether a purchase may qualify for capital allowance claims depends on what the item is, when it was bought and which allowance it fits. In most cases, the value is what the company paid for the item.
If an item qualifies for more than one capital allowance, the company can choose which one to use. The guide to the AIA limit covers one of the main options.
Corporation Tax reliefs a company may use
The rate of Corporation Tax a company pays depends on how much profit it makes. The main rate for non-ring fence profits is 25% for profits above £250,000, and the small profits rate of 19% applies to companies with profits of £50,000 or less. [2] Ring fence companies, which make profits from oil extraction or oil rights in the UK or UK continental shelf, have different rates.
Companies with profits between £50,000 and £250,000 pay tax at the main rate reduced by marginal relief, which gives a gradual increase in the effective rate. Capital allowances work alongside this, because they come off profits before the rate is applied.
When a company sells or disposes of a business asset, Corporation Tax is due on any chargeable gains. Indexation allowance can reflect the rise in an asset's value up to 31 December 2017, and it has been frozen from 1 January 2018.
Marginal relief also applies to companies with profits between £50,000 and £250,000, which gives a gradual increase in the effective Corporation Tax rate. Indexation allowance can also be used when working out a chargeable gain, to reflect the increase in value of the asset up to 31 December 2017.
Allowances open only to companies
Only companies can claim full expensing and the 50% first-year allowance. A company may be able to claim them if it is subject to Corporation Tax and incurred the expenditure on or after 1 April 2023, and the plant or machinery meets further conditions, such as being new and unused. [3]
Full expensing deducts all of the cost of main rate plant or machinery, while the 50% first-year allowance deducts half of the cost of special rate plant or machinery.
The super-deduction and the 50% special rate first-year allowance were also company-only, for certain plant and machinery bought from 1 April 2021 up to and including 31 March 2023. Companies can also claim 100% first-year allowances for plant and machinery for use in a special tax site in UK Freeports or Investment Zones, but only on plant and machinery bought new and unused, and normally not on items bought to lease to other people or for use within a home that is let out.
The annual investment allowance lets a company deduct the full cost of most plant and machinery up to the AIA amount, which is £1 million. A company that does not want to claim the full cost can claim writing down allowances instead, or part of the cost as AIA and part as writing down allowances. Any amount above the AIA can be claimed using first-year allowances or writing down allowances.
Vehicles and the writing down allowance rate change
Vans, lorries and business cars all count as plant and machinery. Where writing down allowances are used, the main rate changed from 18% to 14% on 1 April 2026 for Corporation Tax and on 6 April 2026 for Income Tax. [4]
If a company's accounting period includes the date of the change, it works out a hybrid rate for that period, based on how much of the period falls before the change and how much falls after it.
Cars cannot use full expensing, though other vehicles may qualify for it. If a company provides a car for an employee or director, it can claim capital allowances on the full cost. The guide to the rules for business cars covers car rates in detail.
Do sole traders have capital allowances?
Yes. Sole traders and partnerships claim capital allowances too, but if they use cash basis, they can only claim capital allowances on business cars.
For businesses that pay Income Tax, main and special rates apply from 6 April rather than the 1 April date that applies to businesses paying Corporation Tax.
A sole trader or partnership cannot claim the full value of items also used outside the business. If a sole trader or partnership has more than one business or trade, each business usually gets an AIA. Full expensing and the 50% first-year allowance stay with companies.
If 2 or more limited companies are controlled by the same person, they only get one AIA between them.
Putting allowances on the Company Tax Return
A limited company claims capital allowances on its Company Tax Return and must include a separate capital allowances calculation.
To claim 100% first-year allowances, full expensing and the 50% first-year allowance, or the 40% first-year allowance, the claim must be made in the accounting period the item was bought.
If a company sells or disposes of an asset it claimed full expensing or the 50% first-year allowance on, it must work out the correct charge to add when working out its taxable profits. Keeping each item's cost, purchase date and chosen allowance on record could help identify what has been claimed.
Sources
Rates, thresholds and dates in this guide come from these sources. Check the source for the current figure.