Capital Allowances Calculator UK 2025

Understanding UK Capital Allowances for 2025/26

Capital allowances are the UK tax system's mechanism for allowing businesses to deduct the cost of capital assets against their taxable profits. Unlike regular business expenses (rent, wages, software subscriptions), capital assets — machinery, vehicles, IT equipment — cannot be written off in a single year through accounting depreciation for tax purposes. Instead, HMRC provides a separate system of tax deductions known as capital allowances.

For the 2025/26 tax year, the key capital allowances system comprises the Annual Investment Allowance (AIA), Writing Down Allowances (WDA) on main and special rate pools, and — for limited companies — the Full Expensing regime. Understanding these correctly can dramatically reduce your corporation tax or income tax bill.

Annual Investment Allowance (AIA) — £1,000,000 for 2025/26

The Annual Investment Allowance allows businesses to deduct 100% of the cost of qualifying plant and machinery up to £1,000,000 per year. This limit applies to each business (not each owner), and has been set at £1 million since January 2019. The Spring Budget 2023 confirmed this limit permanently.

AIA provides immediate, full tax relief in the year of purchase. If you spend £50,000 on machinery, you can deduct the full £50,000 from taxable profits immediately — resulting in a corporation tax saving of £12,500 at the 25% rate. This is far more valuable than spreading the deduction over many years through WDA.

Key points about AIA eligibility:

• Applies to most plant and machinery (P&M) except cars
• Cars do NOT qualify for AIA — they use WDA
• AIA is available to sole traders, partnerships, and companies
• Mixed business/personal use assets have allowances restricted proportionately
• Assets must be used in the business to qualify

Writing Down Allowance (WDA) — Main Pool vs Special Rate Pool

For expenditure exceeding the AIA limit, or for assets not eligible for AIA (such as cars), businesses use Writing Down Allowances. These are percentage deductions on the remaining pool value each year:

Full Expensing for Companies (2025/26)

The Full Expensing regime, introduced in April 2023 and made permanent in November 2023, allows incorporated businesses to deduct 100% of the cost of qualifying main pool assets in the year of purchase — with no monetary cap. This is available only to limited companies, not sole traders or partnerships.

Under Full Expensing:

• Main pool assets: 100% First Year Allowance (no AIA limit applies)
• Special rate pool assets: 50% First Year Allowance in year of purchase
• Applies only to new (not second-hand) assets
• Cars are excluded from Full Expensing

For businesses with capital expenditure exceeding £1 million, Full Expensing is more generous than AIA alone.

Cars and Capital Allowances: Special Rules

Cars are treated differently from other plant and machinery under capital allowances rules. They do not qualify for AIA or Full Expensing. Instead, the applicable rate depends on CO2 emissions:

• 0g/km CO2 (fully electric): 100% First Year Allowance
• 1–50g/km CO2: 18% WDA (main pool)
• 51g/km CO2 or more: 6% WDA (special rate pool)

For cars used partly for private purposes, the allowances must be restricted to the business use percentage. Unlike other assets in pools, cars with private use are kept in a single-asset pool so the private use restriction can be applied.

Structures and Buildings Allowance (SBA)

Introduced in 2018, the Structures and Buildings Allowance provides tax relief on the construction and renovation of commercial buildings. The rate is 3% per year on a straight-line basis over 33⅓ years. This covers costs of constructing, converting, or renovating buildings used for qualifying business purposes. Residential properties do not qualify. Land costs are always excluded.

How to Maximise Your Capital Allowances

To ensure you claim the maximum allowances available to your business:

1. Use AIA first on special rate pool assets — Since special rate pool WDA is only 6%, it is far more tax-efficient to use your AIA on these lower-rate assets first, even if that means some main pool assets must use WDA at 18%.
2. Time your purchases carefully — Purchasing assets just before the end of your accounting year means you get the allowance sooner. Purchasing just after means the deduction is delayed a full year.
3. Keep detailed records — Maintain invoices, receipts, and asset schedules. HMRC may request evidence of the nature, cost, and business use of assets claimed.
4. Claim for fixtures — When acquiring a commercial property, commission a specialist capital allowances survey. Fixtures embedded in the building (heating, lighting, toilets) may qualify for allowances, and these are often overlooked.
5. Consider the timing of disposal — When you sell or scrap an asset, you may have a balancing charge (taxable) or balancing allowance (additional deduction). Plan disposals carefully.

Worked Example: IT Equipment Purchase

Frequently Asked Questions: Capital Allowances