A guide to capital allowances for growing firms

Growing businesses often need to invest – in kit, vehicles, fit-outs and software – and the tax relief you can claim on that spend makes a real difference to cashflow. This guide to capital allowances explains the main routes to relief in 2025/26, the assets that typically qualify, how to claim and where firms slip up. We focus on clear, practical steps so you can factor allowances into budgets and make confident purchasing decisions.

At a high level, capital allowances let you deduct the cost of qualifying capital assets from taxable profits. Depending on the asset and the rules you use, you may get relief all at once or over time. For companies, full expensing can provide a 100% deduction for many items of plant and machinery in the year of purchase. For all businesses, the annual investment allowance (AIA) offers up to £1m of relief each year on most plant and machinery. Where neither of these applies, writing down allowances (WDA) provide relief at set rates, and the structures and buildings allowance (SBA) gives relief over time on eligible construction costs.

Used well, these rules can improve post-tax returns, accelerate payback on projects and support sustainable growth. The Office for Budget Responsibility (OBR) estimates that permanent full expensing adds around £15bn to cumulative business investment within the forecast period and 0.1% to GDP by 2028/29, rising to 0.2% in the long run (OBR, 2024). 

Your guide to capital allowances: What’s available in 2025/26

Full expensing (companies only): Companies can claim a 100% first-year deduction for qualifying new and unused main-rate plant and machinery bought on or after 1 April 2023. The associated 50% first-year allowance (FYA) applies to many special rate assets (for example, integral features). Both reliefs are now permanent. You cannot claim full expensing and AIA on the same expenditure. 

Annual investment allowance (AIA): Available to companies and unincorporated businesses, the AIA provides up to £1m of 100% relief each year on most plant and machinery, including many special-rate items where full expensing is not available. AIA is pro-rated for periods shorter or longer than 12 months. 

Writing down allowances (WDA): If you cannot use (or choose not to use) full expensing or AIA, main-rate assets usually go into the main pool at 18%, while special-rate assets (for example, long-life assets, integral features) go into the special rate pool at 6%. Relief is given annually on the tax written down value. 

Structures and buildings allowance (SBA): Qualifying construction and renovation costs may attract 3% straight-line relief each year over 33⅓ years, provided the structure is brought into use for qualifying activities. 

First-year allowances for zero-emission cars and charge-points: A 100% FYA is available for new and unused zero-emission cars and certain EV charge points. The government has extended these FYAs to 31 March 2026 for corporation tax (5 April 2026 for income tax). Cars do not qualify for AIA. 

Further reading: HMRC guidance on full expensing, HMRC guidance on the annual investment allowance, and the OBR note on the economic effects of full expensing.

What counts as plant and machinery

Plant and machinery is broader than many expect. Typical qualifying items include production machinery, manufacturing equipment, office equipment, IT hardware and many fixtures you install in a building you own.

Examples we commonly see include the following.

• Machinery and equipment: Presses, CNC machines, food-processing lines, forklift trucks, palletisers.
• IT and software: Servers, laptops, network gear, some on-premise software licences.
• Fixtures and integral features: Electrical systems, cold-water systems, lifts, heating and air-conditioning.
• Commercial vehicles: Vans and lorries (cars have separate rules).
• Sustainability assets: Solar panels, EV charge points, energy-efficient boilers.

The key tests are ownership, business use and whether the asset is new and unused for full expensing/FYAs. If in doubt, ask us to confirm before you place the order – timing and specification matter.

How to claim – and plan the timing

For companies, claims are made in the CT600 with detailed capital allowance computations. Sole traders and partnerships claim via self assessment. Good records are essential: invoices, commissioning dates, asset descriptions and evidence separating repairs from improvements.

Here are some planning tips that help in practice.

• Sequence your spend: Use full expensing for qualifying main-rate items, AIA for special-rate items, then WDAs for the balance. This often maximises upfront relief.
• Pro-rate periods: If your accounting period is shorter than 12 months (for example, after a change of year end), your AIA limit is pro-rated – avoid surprises by checking the numbers before committing spend.
• Match to profits: If you expect a loss this year and higher profits next year, model whether to defer a claim or elect into WDAs to smooth relief against higher future profits.
• Group considerations: AIA is shared across companies under common control – plan allocations to avoid waste.
• Property purchases: When buying or selling commercial property, ensure fixtures are identified and elections are properly completed so you do not lose allowances on embedded assets.

If you would like us to prepare a capital allowances review, our business tax team can help you structure the claim and file it correctly.

Common pitfalls to avoid

• Cars and AIA: Cars are not eligible for AIA. Consider FYAs for new zero-emission cars or WDAs based on CO₂ bands instead.
• Leased or second-hand assets: Full expensing is not available for second-hand or leased assets. Check terms before you commit. 
• Special-rate assets such as 50% FYA: Companies can claim on many special-rate assets, but rules are specific – mis-classification leads to under- or over-claims.
• Timing errors: The qualifying date of expenditure is usually when the asset is brought into use or delivered and available – not when ordered.
• Repairs vs capital: Repairs are deductible as revenue, while improvements are usually capital. Keep clear evidence to support treatment.
• Period pro-rating – AIA limit: Must be pro-rated for short or long periods; overlooking this is a common cause of HMRC adjustments. 
• Disposals and balancing charges: Sales proceeds can trigger a balancing charge if you claimed FYA or AIA. Plan for this when upgrading kit.

If you want a quick sense-check before you buy, our saving tax page sets out how we approach planning to avoid these traps.

Using allowances to support cashflow and growth

Capital allowances are a lever you can control. They do not change the commercial case for investment, but they can bring relief forwards and improve cashflow in the year you spend.

• Project roll-outs: Phase orders so a larger share qualifies for full expensing or AIA within the year.
• Asset finance: Finance can spread cash cost while you still claim allowances up front (subject to rules). Build this into return on investment (ROI) calculations.
• Energy upgrades: Pair SBA or WDAs with energy savings to shorten payback on refurbishments.
• Fleet strategy: If you need cars, review whether zero-emission models combined with the 100% FYA to 31 March 2026 give you a better overall outcome than petrol or hybrid alternatives (gov.uk).

Policy is designed to encourage investment. As noted earlier, the OBR judges permanent full expensing to raise cumulative business investment within the forecast by around £15bn and to support potential output over time. That context matters when planning sizeable upgrades or automation – the tax system is currently aligned with getting more kit into productive use. 

Put this guide to capital allowances into action

If you are budgeting for growth, capital allowances should be part of the conversation from day one. Start with your asset list, expected delivery dates and a simple forecast of taxable profits. Then map each item to the most effective relief – full expensing where it fits, AIA for the rest and WDAs where appropriate. For building projects, capture SBA-eligible costs early and ensure your contractors’ invoices split fixtures and integral features so nothing is missed. Finally, sense-check the timing across your accounting period so you do not waste AIA or trigger avoidable balancing charges on disposals.

We can help you weigh the options and model the tax and cashflow impact before you sign purchase orders. As a firm that works with growing owner-managed businesses, we build claims that stand up to HMRC scrutiny and genuinely support your plans.

If you would like a practical guide to capital allowances tailored to your spend this year, get in touch with our team – we will scope a clear plan and handle the claim from end to end. Speak to us and we will get the ball rolling.