What are capital allowances and how do they work?

Full answer

Capital allowances are the tax equivalent of depreciation — they allow businesses to deduct the cost of capital expenditure (assets used in the business) from their taxable profits, reducing the corporation tax or income tax bill. **Annual Investment Allowance (AIA):** - **100% first-year deduction** on qualifying plant and machinery - **Annual limit: £1,000,000** per business (includes companies and unincorporated businesses) - Covers equipment, machinery, commercial vehicles, IT, fixtures - Does **NOT** cover: land, buildings, cars, assets used outside the UK, assets with private use **Full Expensing (companies only, permanent from 2023):** - 100% deduction on **main rate** new plant and machinery (above AIA or AIA-exhausted businesses) - 50% deduction on **special rate** assets (long-life, integral features) - No annual limit — applies to unlimited expenditure - Only for **incorporated companies**, not sole traders or partnerships **Writing Down Allowances (WDA) — for assets not qualifying for AIA/FE:** | Pool | WDA rate | Typical assets | |---|---|---| | Main rate pool | **18%/year** | Most plant and machinery | | Special rate pool | **6%/year** | Integral features (heating, lifts), long-life assets | **Cars — CO2-based:** | CO2 emissions | Allowance | |---|---| | 0g/km (pure EV) | 100% first year | | 1–50g/km | 18% WDA (main pool) | | 51g/km+ | 6% WDA (special rate pool) | **Structures and Buildings Allowance (SBA):** For new commercial buildings, a **3% per year** straight-line deduction is available on construction/purchase costs (land excluded).

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