Claiming capital allowances through your limited company (2026 guide)

If your company purchases an asset with a typical lifespan of over a year, tax relief can be applied through a system of capital allowances.

Standard business purchases, such as computer software or accounting fees, are usually immediately deductible against company profits.

Capital assets can also reduce a company’s taxable profits, but the tax treatment depends on the type of asset and the capital allowance available.

In this guide, we explain how capital allowances work and examine the various schemes available.

These include the Annual Investment Allowance (AIA), Writing Down Allowances (WDA), Full Expensing (FE) and first-year allowances.

In this article, Michael McCullion, Managing Director of Bright Ideas Accountancy, explains how capital allowances work and how limited companies can claim tax relief on qualifying business assets.

What is capital?

Depending on the nature of your business, it might acquire ‘capital’ (sometimes known as ‘fixed assets’), which is the equipment used to run your business.

This includes assets such as a van, a laptop, office furniture, premises (owned by the company), or tools. Many of these may qualify as ‘plant and machinery’ for capital allowance purposes (see the official guidance).

What is capital expenditure?

When you purchase a capital asset, this is referred to as ‘capital expenditure’.

Capital expenditure cannot normally be offset directly against your company’s profits as an ordinary revenue expense. Instead, it may attract a ‘capital allowance’, which deducts some or all of the qualifying expenditure from company profits before tax is calculated.

How do you know if an item is classed as a capital asset or simply an item bought as part of your normal running costs?

This depends mainly on the nature and purpose of the expenditure, rather than simply how much the item costs. If in doubt, ask your accountant to clarify.

What are capital allowances?

You can deduct some or all of the value of qualifying capital assets from your company’s profits before you calculate tax, depending on which capital allowance applies.

You can claim capital allowances for your company’s plant and machinery, qualifying research and development capital expenditure, intellectual property and certain other capital assets.

Here is an overview of the main capital allowance schemes used by small and medium-sized companies.

Annual Investment Allowance (AIA)

• Allows businesses to deduct the full cost of most qualifying plant and machinery against profits in the year of purchase.
• The AIA limit is currently £1,000,000 per year (2026/27).
• Assets covered include things like manufacturing equipment, vans, lorries, office equipment and machinery.
• Cars do not qualify for AIA.
• Applies to qualifying main pool and special rate expenditure, subject to the £1m annual limit and the detailed rules.

For example, if your company buys £15,000 of computer equipment, you can normally deduct the full cost under the Annual Investment Allowance.

This reduces your Corporation Tax bill by applying the deduction to that year’s taxable profits.

Full Expensing (FE)

• Introduced from 1 April 2023 and now a permanent feature of the tax system.
• There is no upper limit, unlike the AIA.
• It applies to companies buying qualifying new and unused plant and machinery.
• Full Expensing provides a 100% first-year deduction for qualifying main-rate plant and machinery.
• A separate 50% first-year allowance applies to qualifying new and unused special-rate plant and machinery, with the balance normally entering the special-rate pool.
• Cars are excluded.
• Leased assets are generally excluded from Full Expensing, subject to limited exceptions.

The government has made Full Expensing a permanent feature of the UK tax system. Find out more here. :contentReference[oaicite:1]{index=1}

40% first-year allowance

A new permanent 40% first-year allowance applies to qualifying expenditure incurred on or after 1 January 2026.

• It applies to qualifying new and unused main-rate plant and machinery.
• Businesses can deduct 40% of the qualifying cost in the first year.
• The remaining 60% can then qualify for Writing Down Allowances in later periods.
• Cars are excluded.
• It can apply in some situations where Full Expensing is not available, including certain leasing businesses.

For most small limited companies whose qualifying expenditure is comfortably within the £1m AIA limit, the AIA will often provide more immediate relief. However, the 40% allowance is relevant where AIA or Full Expensing cannot be used. :contentReference[oaicite:2]{index=2}

Writing Down Allowance (WDA)

• Allows businesses to deduct a percentage of an asset pool’s value each year on a reducing balance basis.
• For companies, the main WDA rate is 14% from 1 April 2026, reduced from 18%.
• The special-rate pool continues to attract a 6% annual Writing Down Allowance.
• WDAs can apply where expenditure has not been fully relieved through the AIA or a first-year allowance.
• Cars that do not qualify for a 100% first-year allowance are generally relieved through the appropriate capital allowance pool, depending on their CO2 emissions.

In summary, the AIA allows a 100% deduction up to a per-year limit, while WDAs spread deductions over several years where expenditure has not already been fully relieved.

Capital allowances reduce your Corporation Tax bill rather than providing a separate payment from HMRC. The timing of your claims can still affect the company’s cash flow, especially for high-value purchases.

Further capital allowance schemes

• Research and Development Allowances – 100% capital allowances can be available for qualifying capital expenditure on R&D.
• Structures and Buildings Allowance – provides relief on qualifying expenditure on certain non-residential structures and buildings, normally at 3% per year.
• First-year allowances – certain assets, including some new zero-emission cars, may qualify for 100% first-year relief.
• Enhanced allowances in designated areas – enhanced capital allowances may be available in certain Freeports and Investment Zones.
• Mining and Drilling Allowances – capital expenditure-related allowances apply in certain extraction industries.

What doesn’t qualify?

You can’t claim plant and machinery capital allowances on items your company buys and sells as part of its trade, or on assets that do not meet the relevant qualifying conditions.

Land and most buildings do not qualify for plant and machinery allowances, although some expenditure may instead qualify for the Structures and Buildings Allowance. Assets used partly for non-business purposes can also be subject to restrictions.

The super deduction (2021-2023)

• In the 2021 Budget, then-Chancellor Rishi Sunak introduced a super-deduction for companies investing in qualifying new plant and machinery assets.
• The scheme ran between 1 April 2021 and 31 March 2023.
• This scheme enabled companies to claim 130% capital allowances on qualifying plant and machinery investments.
• Full Expensing (FE) – see above – replaced the super deduction scheme from April 2023 onwards.

How to claim capital allowances

Your accountant will include capital allowances when preparing your annual accounts and Corporation Tax return. For a limited company, the capital allowance calculation forms part of the Company Tax Return and tax computation.

If you use Xero or similar accounting software, its fixed asset register can help you keep track of your assets. However, the correct capital allowance treatment still needs to be dealt with in the company’s tax computation.

Capital allowances are a good way to reduce your company’s tax liability. If you need advice before buying a new asset or accounting for a current one, consult your accountant.

Find out more information about capital allowances on GOV.UK.