What are capital allowances?

Capital allowances are tax deductions that allow UK businesses to write off the cost of business assets (plant and machinery, vehicles, fixtures, etc.) against taxable profits. Instead of deducting the full cost in the year of purchase (as you would with a regular expense), capital allowances spread or accelerate the deduction over time. The main types are the Annual Investment Allowance (AIA, 100% in year one) and Writing Down Allowances (WDA, 18% or 6% per year).

What is the Annual Investment Allowance (AIA) limit for 2026/27?

The Annual Investment Allowance for 2026/27 is £1,000,000 per year. This limit has been permanently set at £1 million since April 2023. It allows businesses of any size to deduct 100% of qualifying capital expenditure (up to £1 million) in the year the asset is purchased. AIA applies to plant, machinery, fixtures, and most business equipment — but not cars or buildings.

What is the Full Expensing scheme for companies?

Full Expensing was introduced in April 2023 and made permanent in the Autumn 2023 statement. It allows incorporated companies (not sole traders or partnerships) to deduct 100% of qualifying main pool plant and machinery in the year of purchase — with no annual cap. For special rate assets (long-life assets, integral features), a 50% First Year Allowance applies. Full Expensing goes beyond the AIA limit for large capital spenders.

Can I claim capital allowances on a car?

Yes, but cars are not eligible for the Annual Investment Allowance. Cars enter the writing down allowance pools: zero-emission cars get a 100% First Year Allowance (100% deduction in year one); cars with CO2 emissions of 50g/km or less enter the main pool (18% WDA per year); cars above 50g/km enter the special rate pool (6% WDA per year). The threshold is based on the car's CO2 emissions.

Capital Allowances UK 2026/27 — Annual Investment Allowance, AIA & Writing Down

Capital allowances are the UK tax system’s equivalent of depreciation deductions — they allow businesses to write off the cost of qualifying assets (machinery, equipment, vehicles, and certain building improvements) against taxable profits. The most important relief is the Annual Investment Allowance (AIA), which allows businesses to deduct 100% of qualifying expenditure in the year of purchase, up to £1,000,000 per year for 2026/27. Incorporated companies also have access to Full Expensing with no upper cap.

Quick answer: If your business bought plant, machinery, or equipment in 2026/27, you can likely deduct the full cost in your tax return using the AIA (up to £1 million). Cars and buildings are treated separately. For large businesses spending above £1 million, Full Expensing applies without a cap (for companies only).

Capital Allowance Rates 2026/27

Type	Rate	Who Can Claim	Annual Cap
Annual Investment Allowance (AIA)	100% in year 1	All businesses	£1,000,000
Full Expensing — main pool	100% in year 1	Companies only	None
Full Expensing — special rate	50% in year 1	Companies only	None
Writing Down Allowance — main pool	18% per year	All businesses	None
Writing Down Allowance — special rate	6% per year	All businesses	None
Zero-emission cars	100% First Year Allowance	All businesses	None
Electric vans	100% First Year Allowance	All businesses	None
Non-electric cars (≤50g CO2/km)	18% WDA — main pool	All businesses	None
Non-electric cars (>50g CO2/km)	6% WDA — special rate pool	All businesses	None

What Qualifies for the AIA?

The AIA covers expenditure on plant and machinery — a broad category that includes:

Business machinery, equipment, and tools
Commercial vehicles (vans, lorries, tractors — not cars)
Computer equipment and servers
Office furniture and fixtures
Factory equipment and production machinery
Integral building features (electrical systems, heating, ventilation, air conditioning — “HVAC”)
Security systems
Display equipment and shop fittings

What Does NOT Qualify for AIA

Cars — these always go into WDA pools (see Car section below)
Buildings — construction and structural costs
Land — never depreciable
Assets acquired for leasing to others in some circumstances
Gifts or assets purchased from connected parties (in some cases)

Writing Down Allowances (WDA): When AIA Is Exceeded or Doesn’t Apply

If your expenditure exceeds the AIA limit, or the asset doesn’t qualify for AIA (e.g., cars), writing down allowances apply. Assets are allocated to pools:

Main pool (18% WDA per year):

Most plant and machinery not in another pool
Cars with CO2 ≤50g/km

Special rate pool (6% WDA per year):

Long-life assets (expected useful life > 25 years)
Integral building features
Thermal insulation added to existing buildings
Cars with CO2 >50g/km

Single asset pools: Used for assets with mixed private/business use.

Worked example — WDA on a petrol car:

A business buys a petrol car (100g CO2/km) for £30,000. It goes in the special rate pool at 6%:

Year	Pool Value	WDA (6%)	Deduction
Year 1	£30,000	£1,800	£1,800
Year 2	£28,200	£1,692	£1,692
Year 3	£26,508	£1,591	£1,591

Contrast with a zero-emission car: 100% First Year Allowance → £30,000 deducted in year 1.

Full Expensing (Companies Only)

Introduced in April 2023 and made permanent, Full Expensing allows incorporated companies to deduct 100% of qualifying main rate plant and machinery in the year of purchase — with no cap.

Asset Type	Full Expensing Rate
Main pool assets (most machinery/equipment)	100% First Year Allowance
Special rate assets (integral features, long-life)	50% First Year Allowance

Who can claim: Limited companies only. Sole traders, partnerships, and LLPs cannot use Full Expensing — they are limited to the AIA.

Practical effect: For large companies spending more than £1 million on qualifying assets in a year, Full Expensing removes the restriction. For smaller businesses, the £1 million AIA is generally sufficient.

Worked Example: AIA for a Small Business

A self-employed carpenter buys equipment in 2026/27:

New van (commercial vehicle): £28,000
Workshop machinery: £15,000
Hand tools and equipment: £3,500
Total: £46,500

All qualify for the AIA. The carpenter deducts £46,500 in full against their trading profits in 2025/26 (the year the assets are first used in the business). At a 40% income tax + NI effective rate on business profits, the tax saving is approximately £18,600.

Balancing Allowances and Charges

When you sell, scrap, or stop using a business asset:

If proceeds are less than the pool value: you get a balancing allowance (extra deduction)
If proceeds exceed the pool value: you face a balancing charge (additional taxable income)
For single asset pools: the balance is always crystallised on disposal

Structures and Buildings Allowance (SBA)

While capital allowances don’t cover buildings themselves, the Structures and Buildings Allowance (SBA) provides a separate 3% per year straight-line deduction for new non-residential structures and building improvements first brought into use after October 29, 2018.

Record Keeping

HMRC requires businesses to maintain:

Purchase invoices showing date, amount, and description
Asset register showing additions and disposals
Pool calculations for each tax year

Keep records for at least 6 years from the accounting year end.

UK Self-Employed Tax Guide — allowable expenses, Class 2 and 4 NI
HMRC Mileage Rates 2026/27 — alternative to capital allowances for cars
Employment Allowance 2026/27 — £5,000 reduction in employer NICs
UK Taxes Hub — complete UK tax guides

The Annual Investment Allowance is one of HMRC’s most generous reliefs — it allows most UK small businesses to fully expense qualifying equipment in the year of purchase. If you bought new plant, machinery, or commercial vehicles in 2026/27, ensure you are claiming the AIA in your Self Assessment or company tax return.

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

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