Capital Allowances and your limited company

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

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

Capital assets also reduce a company’s taxable profits, but they are accounted for over time

In this guide, we explain how capital allowances are – and look at the different schemes available.

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

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 like a van, laptop, office furniture, premises (that are owned by the company) or tools. These are known as ‘plant and machinery’ (see the official definition).

What is capital expenditure?

When you buy a capital asset, this is known as ‘capital expenditure’.

Capital expenditure cannot be offset directly against your company’s profits.

Instead, it may attract a ‘Capital Allowance’, which deducts the cost of your capital 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?

Generally, the cost of the item (when considered alongside the overall size and value of your company) determines this.

If in doubt, ask your accountant to clarify this for you.

What are Capital Allowances?

You can deduct the full value of most types of capital assets from your company’s profits before you calculate tax.

You can claim capital allowances for your company’s plant and machinery, research and development, 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 plant and machinery assets against profits in the year of purchase.
• The AIA limit is currently £1,000,000 per year (2023/24).
• Assets covered include things like manufacturing equipment, cars, other vehicles, machinery, etc.
• Applies to both main pool and special rate assets for the first £1m spent by the business.
• Cannot be claimed on long-life assets (over 25 years).

Full Expensing (FE)

• Introduced in the Spring 2023 Budget – applies to assets purchased on or after April 1st 2023.
• There is no upper limit – unlike the AIA.
• Similar to the AIA, but only applies to new and unused assets.
• Allows 100% claim in first year for main pool assets, but only 50% on special rate assets. The remaining asset cost is discounted at 6% over time.
• Cannot apply to leased assets (in most cases).

Writing Down Allowance (WDA)

• Allows businesses to deduct a percentage of the asset’s value each year on a reducing balance basis.
• The WDA rates are currently 18% for main pool assets (plant and machinery) and 6% for special rate pool assets each year.
• Applies to costs not already covered by the AIA, or costs above the £1m AIA limit in a given year.
• For example, your company car may be worth £20,000 when you buy it as a capital asset, but each year its value will lessen through depreciation.

In summary, the AIA allows 100% deduction up to a limit per year, while WDAs spread deductions over several years for larger value items or costs not covered by the current annual AIA limit.

Further capital allowance schemes

• Research and Development Allowances – 100% first year capital allowance for R&D related capital expenditure.
• Structures and Buildings Allowances – Tax relief for expenditure on certain structures and buildings.
• Enhanced Capital Allowances – 100% first year allowances on investments in designated environmentally beneficial technologies and water conservation assets.
• Mining and Drilling Allowances – Capital expenditure related allowances in the extraction industries.

The super deduction (2020 – 2023)

• In the 2020 Budget, then-Chancellor Rishi Sunak introduced a so-called super-deduction for companies investing in qualifying new plant and machinery assets.
• The scheme ran between 1st April 2021 and 31st 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.

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

Find out more information about Capital Allowances on GOV.UK.