A company that buys £150,000 of new machinery can deduct the whole £150,000 from its profits in the year it buys it. A sole trader can do the same for up to £1,000,000 of equipment a year. The routes differ. The Annual Investment Allowance (AIA) is open to sole traders, to partnerships made up entirely of individuals, and to companies. Full expensing is for companies only. Cars are outside both.
Everything else fills the gaps: a 50% first-year allowance for companies buying special rate assets, a new 40% first-year allowance for businesses that cannot use full expensing, and writing-down allowances for what is left. The main writing-down rate is falling from 18% to 14% during 2026. The catch is the same for all of them. Deduct the full cost now and sell the asset later, and you may have to bring some of it back into profits as a balancing charge.
What capital allowances are
Capital allowances let a business write off the cost of capital assets, such as plant or machinery, against its taxable income. HMRC's policy paper describes them as taking the place of commercial depreciation, which is not allowed for tax. In your accounts you depreciate equipment. For tax, you ignore that figure and claim capital allowances instead.
The starting point is HMRC's helpsheet on capital allowances and balancing charges (HS252). It separates two kinds of spending:
- Allowable expenses. Small items used in the day-to-day running of the business, such as stationery, are deducted as ordinary expenses.
- Plant and machinery. Tools, equipment, desks, computers and cars you keep to use in the business cannot be claimed as an expense. You may be able to claim capital allowances instead.
Nothing can be claimed both ways. HMRC says you cannot claim capital allowances for any cost you can claim as an allowable expense.
Plant and machinery allowances do not cover stock (things you buy and sell as part of your trade), furniture and equipment in a let dwelling such as a house, flat or bungalow, or land and buildings. Certain parts of buildings, such as electrical, lighting, heating and ventilation systems, are the exception. HMRC calls these integral features, and they come up again below because they are special rate assets.
Two more points on scope:
- Who can claim. The self-employed, partnerships, companies and organisations that pay Corporation Tax, and landlords (but not for use in dwellings). An employee who buys equipment they need for their job, because the employer does not provide it, can also claim, though not for cars, vans, motorbikes or bicycles.
- Cash basis. HMRC says you cannot claim capital allowances if you use the cash basis, with an exception for expenditure on cars. If you are a sole trader or partner on the cash basis, check how your equipment spending is treated before you assume any of this applies.
The allowances begin when the business does. Items bought before the activity started can be claimed too, treated as bought on the commencement date if the asset was provided for the business.
Capital allowances are given for a chargeable period. For a company that is the accounting period, which cannot exceed 12 months but can be shorter. For a self-employed business it is the period of account, which can be longer or shorter than 12 months.
How you calculate depends on pooling. You add the cost of an item to a pool with the other items bought for business use. The allowance is worked out on the pool total, not item by item. The cost counts net of VAT unless you are not VAT-registered, and it includes the cost of installing or improving the item. If you buy on hire purchase or other finance, the original cost goes in, not the interest or charges.
The Annual Investment Allowance
The AIA gives 100% relief on up to £1,000,000 of qualifying spending in a chargeable period. The figure is in section 51A of the Capital Allowances Act 2001. It was temporarily £1 million from 1 January 2019, and the government made that level permanent. HMRC's policy paper says it would otherwise have reverted to £200,000.
Who can use it
Individuals, partnerships made up entirely of individuals, and companies. HMRC's helpsheet says trustees, and partnerships that are not made up entirely of individuals, cannot claim. So a partnership with a company as one of its partners is out.
What qualifies
BDO's summary is that you can claim AIA on most plant and machinery, apart from cars. That covers new and second-hand items. The helpsheet lists what does not qualify:
- cars;
- items you received as a gift;
- items you bought for another reason before you started to use them in the business.
The statute requires that the spending is incurred in the chargeable period and that you own the plant or machinery at some point in it. It also lets you claim all of the AIA you are entitled to, or only some of it.
Short and long periods
The £1,000,000 is scaled to the length of the chargeable period. Section 51A says that if the period is more or less than a year, the maximum is proportionately increased or reduced. A six-month period gives a maximum of £500,000. A business that starts trading part-way through a year, or changes its year end, needs to check this before assuming it has the full figure.
Group sharing and common control
The AIA is not multiplied by splitting a business. The Act sets out five restrictions:
- A company has one AIA across all its activities in a chargeable period.
- A parent undertaking and its subsidiaries share a single AIA between them, and can allocate it as they think fit.
- Two or more groups under the same control, and related to one another, share a single AIA.
- Other companies under common control, and related to one another, share a single AIA.
- Unincorporated businesses carrying on related activities under common control get a single AIA across them. If one person runs two related activities, they have one allowance between them.
What counts as "related" and "controlled" is defined in sections 51F, 51G, 51I and 51J of the Act. If you have more than one business or company, read those sections or ask an adviser before you plan around £1 million each.
Full expensing for companies
Full expensing lets a company within the charge to Corporation Tax claim 100% of the cost of main rate plant and machinery in the accounting period it buys it. Unlike the AIA there is no cap. HMRC's policy paper says the more a company invests, the greater the potential saving.
It started for spending on or after 1 April 2023, replacing the 130% super-deduction that ran from 1 April 2021 to 31 March 2023. The government has since made it permanent.
HMRC's conditions are:
- the spending must be incurred on or after 1 April 2023;
- the asset must be unused and not second-hand;
- it must not be provided for leasing, unless the lease is of background plant or machinery within a building;
- cars are excluded;
- the claimant must be a company within the charge to Corporation Tax. Sole traders and partnerships cannot use full expensing.
It is a claim, not automatic. You can claim all, part or none of it. A company that spends less than £1 million a year may find the AIA does the same job, since both give 100% relief. Full expensing matters once spending passes the AIA limit, and it can be used instead of the AIA on main rate items so the AIA is free for special rate items.
The 50% first-year allowance for special rate assets
Some plant gets a lower rate of writing-down allowance and cannot use full expensing. HMRC's special rate assets include integral features of buildings and structures, solar panels, and assets with an expected life of at least 25 years. The legislation also lists thermal insulation.
For these, a company can claim a 50% first-year allowance in the accounting period of purchase. The conditions mirror full expensing: spending on or after 1 April 2021, unused and not second-hand, and not for leasing except background plant in a building. Cars are excluded, and so are unincorporated businesses.
The remaining 50% is not lost. HMRC says the balance can be added to the special rate pool in the following accounting period, and it is then relieved by writing-down allowances at 6% a year.
If you have AIA left, use that on special rate items first. It gives 100% relief against 50%. The 50% allowance is for spending beyond what the AIA covers.
The new 40% first-year allowance
From 1 January 2026 there is a permanent 40% first-year allowance for main rate spending. HMRC's policy paper says it is for cases where full expensing is not available, such as assets bought for leasing and purchases by unincorporated businesses. It is open to all businesses, not just companies.
It excludes:
- second-hand assets;
- cars;
- assets for overseas leasing.
For most small businesses it is a second-order allowance. A sole trader spending under £1 million a year will normally put equipment through the AIA at 100%. The 40% allowance matters when spending exceeds the AIA, when the AIA is used up on other items, or when the asset is bought to lease out.
BDO's note on disposals says the special tracking rules for assets claimed under full expensing or the 50% allowance do not apply to expenditure eligible for the 40% allowance.
Writing-down allowances and the cut to 14%
Whatever you do not relieve through the AIA or a first-year allowance goes into a pool and is written down each year on a reducing balance. There are two main pool rates:
| Pool | Writing-down rate | Notes |
|---|---|---|
| Main pool | 14% a year | Was 18% (the rate since 2012) |
| Special rate pool | 6% a year | Unchanged |
HMRC's policy paper sets the main rate at 14% from 1 April 2026 for businesses within Corporation Tax and from 6 April 2026 for businesses within Income Tax. If your chargeable period straddles that date, a hybrid rate applies, based on the proportion of the period before and after.
The rate cut does less damage than it looks, because most small businesses claim in full in the year of purchase. HMRC says many businesses will not be affected, because they will keep claiming all their spending up front through the AIA or full expensing. It falls hardest on pools of older spending and on anything not covered by an up-front allowance.
You can use writing-down allowances for part of the cost whenever it suits you, as long as you still own the item. HMRC's helpsheet gives the pool method: take the balance brought forward, add the cost of items bought (leaving out spending where you claim a first-year allowance), deduct the AIA you are claiming and any sale proceeds, and apply the rate to what is left.
A car with higher CO2 emissions would be a special rate item in a single-asset pool, and a computer would be main rate. You cannot claim AIA or the first-year allowances on cars generally. New electric and zero-emission cars have their own 100% first-year allowance, and BDO dates the EV charge point and zero-emission car allowance to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.
Which allowance gives what
| Allowance | Rate | Who | Cap | Cars |
|---|---|---|---|---|
| AIA | 100% | Individuals, partnerships of individuals, companies | £1,000,000 a year | Excluded |
| Full expensing | 100% | Companies only | None | Excluded |
| 50% first-year allowance | 50% | Companies only | None | Excluded |
| 40% first-year allowance | 40% | All businesses | None | Excluded |
| Main pool WDA | 14% | All | None | n/a |
| Special rate pool WDA | 6% | All | None | n/a |
BDO puts a number on the value to a company in year one, at a 25% Corporation Tax rate: 25p in the pound for AIA or full expensing, 12.5p for the 50% allowance, 10p for the 40% allowance, 3.5p for main pool WDA, and 1.5p for special rate WDA. For current Corporation Tax rates, see our guide to UK corporation tax rates and marginal relief.
Selling an asset: balancing charges
If you sell something you claimed allowances on, you usually deduct the sale price from the pool before working out the year's allowances. If the sale price is more than the pool balance, the difference is a balancing charge, added to your profits.
This catches people who claimed 100% up front. A pool still exists even if you claimed the AIA or a 100% first-year allowance on everything, but its balance is nil. Selling at that point puts the whole sale price into profits.
HMRC's own example is a van bought for £10,000 and sold three years later for £4,000, so the net cost was £6,000. If you claimed £10,000 AIA when you bought it, you have had more allowances than the net cost. With a nil pool, you have a £4,000 balancing charge. If the pool balance was £500, the charge is £3,500, the difference between £4,000 and £500.
For companies, the rules are stricter on the enhanced allowances. A balancing charge always arises when a company sells or disposes of an asset on which it claimed full expensing, the 50% allowance or the old super-deduction. The charge equals:
- 100% of the disposal value for full expensing;
- 50% of the disposal value for the 50% allowance;
- up to 130% of the disposal value for the super-deduction.
It reduces proportionately if you claimed on only part of the cost. HMRC's example for the 50% allowance: a company spends £100,000, claims £50,000, pools the other £50,000 in the second year, and sells for £80,000 in the third. The balancing charge is £40,000 (50% of £80,000). The other £40,000 of disposal value reduces the special rate pool, and if that pool falls below zero there is a further charge.
The disposal value depends on what happened to the asset. If you sell it, it is the proceeds. If it was lost or destroyed, it is insurance and other compensation received. If you kept it or gave it to a family member, it is market value.
There is a mirror image. If the business stops trading, any pool balance left after deducting sale proceeds or market value is a balancing allowance, deducted from profits. In the main and special rate pools that only happens on cessation. In a single-asset pool it can arise on disposal at any time.
If you expect to sell an asset soon, claiming the maximum may bring forward a deduction that returns as a charge. Full expensing is optional for this reason, and a smaller claim, with the rest through writing-down allowances, can be the better choice for something you will not keep.
When and where to claim
You claim on your tax return, and the return depends on your structure:
- sole traders: Self Assessment tax return;
- partnerships: the partnership tax return;
- limited companies: the Company Tax Return, which must include a separate capital allowances calculation.
The timing rules are strict. To claim the AIA, a 100% first-year allowance, full expensing, the 50% allowance or the 40% allowance, you must claim in the accounting period in which you bought the item. Miss that period and you cannot go back and claim the up-front allowance later. Writing-down allowances are flexible. You can claim part of the cost that way at any time while you still own the item.
The purchase date is the date you signed the contract if payment is due in less than four months. If payment is due more than four months later, it is the payment due date. That can move a purchase into the next period, which matters near a year end.
For hire purchase, once you start using the item you can claim for all the payments you will make under the contract. You cannot claim the interest. Leased-out assets can attract allowances, but not first-year allowances, and that does not apply to hire-purchase or long-funding leases.
Worked example: a sole trader
Sam is a sole trader making £50,000 profit before capital allowances. In the year, Sam buys £6,000 of tools, £4,000 of computers and a £5,000 second-hand machine. Total spend is £15,000. All of it qualifies for the AIA, because the AIA works on second-hand equipment, and none is a car.
- Claim the AIA in full. £15,000 is deducted, so taxable profit is £35,000. The AIA limit of £1,000,000 is nowhere near used.
- Claim only part. Say Sam claims £5,000 of AIA and leaves £10,000 in the main pool. Writing-down at 14% gives £1,400, assuming the period falls wholly after 6 April 2026. The total deduction is £6,400, and the remaining pool carries forward.
The full claim gives the earlier relief. The part claim leaves allowance for later years, which can help if profits are low this year.
Two years later Sam sells the second-hand machine for £3,000. Under the full-claim route the pool is nil, so the £3,000 is a balancing charge added to that year's profit. Sam still came out ahead on timing, but the sale price comes back as taxable income.
If Sam had instead been on the cash basis, none of this would apply, because HMRC says capital allowances are not available under the cash basis except for cars. Whether you are better as a sole trader or a company is a wider question, covered in sole trader or limited company.
Worked example: a company
Harbour Fabrication Ltd spends £1,200,000 in one accounting period, all new and unused, none for leasing: £1,000,000 on main rate machinery and £200,000 on a new ventilation system, which is an integral feature and so a special rate asset.
The best split uses the AIA on the special rate item and full expensing on the rest:
| Spend | Claim | Deduction |
|---|---|---|
| £200,000 ventilation | AIA | £200,000 |
| £800,000 of machinery | AIA (uses the rest of the £1,000,000) | £800,000 |
| £200,000 of machinery | Full expensing | £200,000 |
| Total | £1,200,000 |
Everything is relieved in the year. At the 25% rate BDO uses, that is £300,000 off the Corporation Tax bill.
The alternative shows why the order matters. If the company used the AIA on the machinery and the 50% first-year allowance on the ventilation, it would deduct £1,000,000 plus £100,000, which is £1,100,000. The remaining £100,000 would go into the special rate pool and be written down at 6% a year.
A later sale then triggers the charges described above. If the company sells the machinery claimed under full expensing for £60,000, the balancing charge is £60,000, which is 100% of the disposal value.
Frequently Asked Questions
Can a sole trader claim full expensing?
No. Full expensing and the 50% first-year allowance are for companies. A sole trader uses the AIA, up to £1,000,000 a year, and from 1 January 2026 can use the 40% first-year allowance on main rate spending beyond that.
Does the AIA cover cars?
No. Cars are excluded from the AIA, from full expensing and from the 50% and 40% first-year allowances. New electric and zero-emission cars have a separate 100% first-year allowance.
Can two companies in the same group each claim £1 million?
No. A parent undertaking and its subsidiaries share a single AIA, and related companies under common control also share one. They can allocate it between them as they see fit.
What is the main writing-down rate now?
It is 14%, down from 18%, from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax, with a hybrid rate for periods that straddle those dates. The special rate pool stays at 6%.
What happens if I sell equipment I claimed 100% on?
The sale price (or market value if you keep or give it away) is deducted from the pool. If the pool is nil, the whole amount is a balancing charge added to your profits. For companies that claimed full expensing, a charge always arises, equal to 100% of the disposal value.
Deplexify prepares UK accounts, tax returns and Making Tax Digital filings; the UK page sets out what that covers.