Growing a business is exciting, but every pound counts. Tax reliefs can free up working capital and help you reinvest sooner. That is why we have written this guide to capital allowances – to give owners and finance teams a clear, practical route through the UK rules for writing off the cost of equipment, vehicles and even buildings against taxable profits.
Capital allowances are not a one‑size‑fits‑all deduction. There are several schemes, each with its own rate, qualifying criteria and claim window. Select the right one and you will reduce your corporation (or income) tax bill and strengthen cashflow; miss out and you can lose thousands of pounds that could have funded new hires or marketing.
The stakes are higher than ever. UK businesses invested more than £280 billion in plant and machinery in 2024 (ONS, 2024) and HMRC data shows SMEs alone claimed over £8.1 billion of capital allowances in 2023‑24 (HMRC, 2024). From April 2025 the £1 million Annual Investment Allowance (AIA) remains, full expensing is permanent for main‑pool assets, the 50% first‑year allowance for special‑rate items has been extended, and the Structures & Buildings Allowance (SBA) still gives 3% straight‑line relief. Understanding how these reliefs interact is now an essential management skill.
Our Croydon‑based team works with professional services, hospitality and retail companies every week. The insights below are drawn from that front‑line experience and should leave you confident about making – and defending – a claim.
Why capital allowances matter for SMEs
Corporation tax on profits above £250,000 is 25% for 2025/26, while the small‑profits rate is 19%. Even at the lower rate, a £50,000 investment written off through the AIA can cut a tax bill by £9,500 in the very first year. Multiply that across a refurbishment or a fleet replacement programme and the savings add up fast.
The Office for Budget Responsibility estimates that permanent full expensing will raise overall business investment by around 3% a year once fully embedded (OBR, 2024). For owner‑managed firms that can mean the difference between standing still and funding the next stage of growth. Capital allowances therefore sit at the heart of strategic planning as well as compliance.
The main types of capital allowances
Knowing which pot an asset falls into is half the battle. The current headline schemes are:
- Annual Investment Allowance: 100% relief on up to £1 million of qualifying expenditure each year, available to companies and unincorporated businesses alike.
- Full expensing: 100% first‑year deduction for most new plant and machinery purchased by companies.
- 50% first‑year allowance: applies to new special‑rate assets such as integral features in larger buildings when full expensing is not available.
- Structures & Buildings Allowance: 3% straight‑line relief each year over 33⅓ years for qualifying construction and refurbishment costs.
- Writing‑down allowances: 18% (main pool) or 6% (special‑rate pool) on any balance that does not qualify for the faster reliefs above.
A sound guide to capital allowances helps you map specific purchases – coffee machines in a café, laptops in a consultancy, refrigeration units in a deli – to the correct bucket so that nothing slips through the net.
The guide to capital allowances: Claiming step by step
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- Compile a detailed asset register: Break invoices down so that fixtures, fittings and loose equipment are separately costed.
- Check eligibility: Confirm each item is “plant or machinery”, bought for business use and owned on your accounting year‑end.
- Choose the optimum relief:
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- Small projects under £1 million: use the AIA in full.
- Larger projects: claim full expensing on main‑pool assets, the 50% first‑year allowance on special‑rate items, and the AIA on anything that falls outside those headings.
- File the claim: Include the figures in your corporation (or income) tax return and attach a short schedule for HMRC.
- Keep the evidence: Store invoices, financing agreements and photographs for at least six years.
Follow this guide to capital allowances each year and you will have robust documentation ready if HMRC queries your figures.
Common pitfalls and how to avoid them
- Mixed‑use assets: Apportion personal use and claim only the business element.
- Missed integral features: Lighting and air‑conditioning in a fit‑out often sit on a contractor’s single line. Split them out during cost review.
- Timing traps: Assets bought on hire purchase count as “owned” when first brought into use, not when the finance is settled.
- Connected parties: Buying property from a director? A formal valuation prevents an HMRC challenge.
Planning for growth – using allowances to boost cashflow
Well‑timed spending can smooth tax payments across growth phases. For example, schedule equipment purchases just before your year‑end to accelerate relief into an earlier tax return. Where profits fluctuate between the marginal band (£50,000–£250,000), a large AIA deduction can protect you from tipping into the 25% bracket.
We also see clients combining the SBA with separate claims on removable fixtures, unlocking faster deductions than simply capitalising everything within the building cost. A short consultation with us often turns an acceptable claim into a great one – and frees up capital for marketing, extra staff or debt reduction.
Keeping HMRC onside: record keeping and compliance
HMRC’s digital approach means many enquiries start with an automated risk filter. Clear schedules, tagged invoices and a concise explanation of your guide to capital allowances methodology usually close the matter quickly. Use cloud accounting software and link your asset register so that additions migrate straight into your tax computation. We recommend periodic internal reviews rather than a last‑minute scramble before the return deadline.
Take the next step
Capital allowances are more than a compliance tick. Applied thoughtfully, they underpin growth, protect cashflow and give you a competitive edge. Our quick guide to capital allowances has shown how the reliefs work, where mistakes happen and why timely planning makes all the difference.
If you would like tailored advice, please talk to our capital allowances specialists or browse our wider business tax planning services. We will review your asset register, explain the options in plain English and handle the paperwork – leaving you free to focus on running your business.
