Meet Priya. She runs a small bakery through a limited company and has just spent 18,000 pounds on a new commercial oven and a delivery van. She wants to know how much of that she can claim against her corporation tax bill. The answer lies in capital allowances — and once you understand the basics, they are surprisingly straightforward.

This article is general information, not financial or legal advice. Rules and figures change, so always check the latest guidance on GOV.UK or speak to a qualified accountant.

What Are Capital Allowances?

When your business buys something it will use for more than a year — a machine, a vehicle, office furniture — that is called a capital asset. You cannot normally deduct the full cost in one go as a regular business expense. Instead, you claim capital allowances, which spread the tax deduction over time or, in some cases, let you deduct the whole cost in the year you buy it.

Capital allowances reduce your taxable profit, which means you pay less corporation tax or income tax. They apply to what HMRC calls "plant and machinery" — a broad category that includes far more than it sounds.

What Counts as Plant and Machinery?

The term sounds industrial, but HMRC's definition is wide. Plant and machinery includes:

Machinery, tools, and equipment used in the business
Vehicles (cars, vans, lorries)
Office furniture and computers
Some fixtures in a building, such as heating and electrical systems
Security and alarm systems

What does not qualify includes the building itself, land, and most items that are part of the fabric of a structure rather than a separate fitting. If you are unsure whether something qualifies, HMRC's guidance or an accountant can clarify.

The Annual Investment Allowance (AIA)

For most small businesses, the Annual Investment Allowance is the most useful tool. It lets you deduct the full cost of qualifying plant and machinery in the year you buy it, up to a generous annual limit. Check the current AIA limit on GOV.UK because it has changed before and may change again.

Back to Priya: her oven and van together cost 18,000 pounds. If that is within the AIA limit (and at current levels it almost certainly is), she can deduct the entire amount from her taxable profit in the same year she buys them. At a corporation tax rate of 25%, that could save her 4,500 pounds in tax.

The AIA applies to both limited companies and sole traders or partnerships, but there are rules about how it works if you have multiple businesses or a short accounting period. Check the details if either applies to you.

Full Expensing: The Company Option

Full expensing is a separate relief available to limited companies that pay corporation tax. It allows a company to write off the full cost of new, unused qualifying plant and machinery in the year of purchase — with no upper cash limit. This is different from the AIA in a few ways:

It applies only to companies, not sole traders or partnerships.
The asset must be new and unused, not second-hand.
There are two rates: 100% for main-rate assets (most plant and machinery) and 50% for special-rate assets (things like long-life equipment and some integral building features).
There are rules that apply if you later sell the asset.

Full expensing was introduced to encourage business investment. For a company spending large amounts on qualifying equipment, it can make a significant difference to cash flow by reducing tax earlier.

The timing of capital allowance claims matters. Buying equipment just before your accounting year end means you get the relief a year earlier than if you wait until just after — which is real money in your pocket sooner.

What Does Not Qualify — and Common Mistakes

Not everything you buy qualifies, and some businesses claim things they should not. Watch out for:

Cars: Standard capital allowances apply to cars rather than AIA or full expensing, and the rate depends on the car's CO2 emissions. Electric cars currently attract a favourable rate.
Land and buildings: The structure itself does not qualify for plant and machinery allowances, though there is a separate Structures and Buildings Allowance for some construction costs.
Leased assets: If you lease rather than buy equipment, you generally cannot claim capital allowances — but you can deduct the lease payments as a business expense.
Items with non-business use: If you use something partly for personal use (common with vehicles), only the business proportion qualifies.

How to Claim

Capital allowances are claimed on your tax return — either your company's corporation tax return (CT600) or your Self Assessment return if you are self-employed. You do not need to tell HMRC when you buy something; you simply include the claim in your return for that accounting period.

Keep your invoices and receipts. HMRC may ask for evidence of purchase dates and costs, particularly for larger items. Good record-keeping is the foundation of a clean capital allowances claim.

If you are also investing in research and innovation, it is worth reading our guide to R&D tax credits, which can work alongside capital allowances to further reduce your tax bill.

Quick Summary

Capital allowances let you deduct the cost of business assets from your taxable profit.
The AIA gives an immediate 100% deduction up to the annual limit — check the current limit on GOV.UK.
Full expensing gives companies a 100% deduction on new qualifying assets with no cash cap.
Cars, land, and buildings are treated differently — check the rules before claiming.
Keep invoices and claim on your tax return.