Capital allowances and the Annual Investment Allowance explained
When your business buys equipment, you rarely get to knock the whole cost off your profit the way you would a phone bill. Capital allowances are the rules that decide how much of that spend reduces your tax, and when. Get the timing right and a big purchase can wipe out a tax bill; get it wrong and you wait years for the relief.
What capital allowances actually are
Most things you buy to use in the business for the long term — machinery, tools, computers, equipment, commercial vehicles — count as capital, not as everyday running costs. That means you can't simply deduct the full price as an expense the way you would stock or stationery. Instead, capital allowances give you tax relief on that spending, either all at once or spread over several years. The main routes are the Annual Investment Allowance, full expensing and writing-down allowances.
The Annual Investment Allowance
The Annual Investment Allowance (AIA) is the workhorse for most small businesses. It gives you 100% relief in the year of purchase on qualifying plant and machinery, up to £1,000,000 a year. It is available to companies, sole traders and partnerships alike, and it covers both new and second-hand assets.
For the overwhelming majority of small businesses, the £1m limit is far more than you will ever spend in a year, so in practice the AIA means your equipment is fully deductible in the year you buy it. Spend £8,000 on a new van fit-out or workshop kit, and the whole £8,000 comes off your taxable profit straight away.
Full expensing — the company-only option
Limited companies have a second route: full expensing, which gives 100% immediate relief with no annual limit on qualifying new main-rate plant and machinery. It applies only to companies, and only to new assets, not second-hand ones.
For a typical small company spending well within the £1m AIA, the two overlap and it makes little practical difference. Where full expensing earns its keep is a large capital programme — if a company spends more than £1m on new equipment, full expensing keeps the relief flowing where the AIA would have run out. If you are weighing up a significant investment, it is worth checking how it interacts with your year-end accounts and tax position first.
Writing-down allowances and the 2026 change
Not everything gets 100% up front. Assets that fall outside the AIA or full expensing go into pools and are written down by a set percentage each year. From April 2026 the main pool writing-down allowance falls from 18% to 14%, so relief on anything not covered by the AIA or full expensing is now a little slower. The special rate pool — integral building features and some cars — is written down at 6%. There is also a new 40% first-year allowance on main-rate expenditure, introduced from 1 January 2026.
The practical message for most small businesses is reassuring: your ordinary equipment purchases still get full relief through the AIA. The slower pools mainly affect cars and larger specialist assets.
Cars are the big exception
Cars do not qualify for the AIA or full expensing. They get writing-down allowances based on CO2 emissions, which is why a petrol or diesel car gives relief painfully slowly. A new fully electric car bought by a business, by contrast, currently qualifies for a 100% first-year allowance — one of several reasons electric company cars are so tax-efficient at the moment. We cover the wider picture in our guide to company car tax for directors.
Timing is everything
Because relief usually lands in the period an asset is first brought into use, the date you buy matters more than people expect. Bringing a planned purchase forward before your year-end can pull the relief into the current year and cut this year's tax; pushing it a few weeks past year-end can defer the saving by twelve months. It is one of the simplest pieces of planning there is, and it is worth a quick conversation before any significant purchase — especially around a Budget, when allowances can change.
Getting capital allowances right is one of the most straightforward ways to cut a tax bill legally, and it is easy to leave money on the table by claiming the wrong allowance or mistiming a purchase. We help businesses across Garforth, Leeds and West Yorkshire plan their equipment spending so the relief lands when it is most useful. If you have a big purchase on the horizon, ask before you buy — the order you do things in can be worth real money.
This is general information, not advice for your circumstances. If you'd like it applied to your situation, get in touch — the first chat is free.
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