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Capital Allowances in the UK: Key Points

Capital allowances are a form of tax relief available to UK businesses, allowing them to offset the cost of purchasing qualifying assets, such as machinery, vehicles, and equipment, against their taxable profits. This enables businesses to reduce their overall tax liability, improving cash flow and providing financial benefits over time. Capital allowances help spread the cost of assets over several years, with certain allowances offering immediate or accelerated relief.

What Are Capital Allowances?

  • They are deductions that businesses can claim for the depreciation of tangible assets, such as equipment, machinery, or vehicles, used in the course of their business. 

Eligibility

  • Available to UK businesses, including sole traders, partnerships, and companies.

  • Claimable on qualifying capital assets, including plant and machinery, office equipment, and some types of building improvements.

  • Assets must be used in the business to qualify for capital allowances.

Types of Capital Allowances

  • Annual Investment Allowance (AIA):

    • Provides 100% tax relief on the first £1 million (as of 2025) of qualifying expenditure on plant and machinery.

    • Available to most businesses, with no restrictions on the number of claims.

  • First Year Allowances (FYA):

    • Allows 100% tax relief in the year of purchase for certain energy-efficient or environmentally friendly assets.

    • Applies to assets such as low-emission cars, energy-saving equipment, and other specified items.

  • Writing Down Allowances (WDA):

    • Claims for assets not covered by AIA or FYA, allowing a deduction for the depreciation over time.

    • Typically set at 18% per year for general plant and machinery, and 6% per year for long-life assets.

  • Structures and Buildings Allowance (SBA):

    • Provides tax relief on the construction, renovation, and conversion costs of qualifying buildings.

    • Allows businesses to claim 3% of the cost of construction per year over 33 years.

Qualifying Assets

  • Plant and machinery (e.g., factory equipment, computers, office furniture).

  • Vehicles used for business purposes.

  • Buildings and structures, including certain fixtures and fittings.

  • Some improvements to existing buildings.

Claiming Capital Allowances

  • Claims are made through your company’s Corporation Tax return (or self-assessment for sole traders and partnerships).

  • Businesses can claim capital allowances in the same year as the asset purchase, or over several years (depending on the type of allowance).

Financial Benefits

  • Reduces taxable profits and therefore lowers the amount of tax a business has to pay.

  • Offers immediate or gradual tax relief, depending on the type of allowance claimed.

  • Can significantly improve cash flow, especially when claiming AIA or FYA.

How P10 Financial Can Help

  • Identifying qualifying assets and ensuring accurate claims.

  • Helping to maximize available allowances and optimise tax relief.

  • Providing guidance throughout the claim process, from assessment to submission.

Capital allowances provide an opportunity to reduce your business’s tax burden and improve your financial position, allowing you to reinvest in your business and grow.