Capital Allowances for Sole Traders 2026/27: AIA, Vans & Cars Explained

What are capital allowances and why they matter for sole traders

When a sole trader buys equipment, tools, machinery or a vehicle for the business, the cost usually can't simply be deducted as a normal expense in one go — instead, tax law uses "capital allowances" to spread or accelerate relief for capital expenditure. The Annual Investment Allowance (AIA) is the main mechanism most self-employed people use, because it lets you deduct the full cost of most qualifying items in the year you buy them, rather than spreading relief over several years.

The Annual Investment Allowance: £1 million a year

The AIA currently stands at £1 million per year. For the vast majority of sole traders, whose annual capital spending is nowhere near that limit, this means:

• Buy a laptop, tools, office furniture, machinery, or a van for the business, and you can typically deduct 100% of the cost from your taxable profit in the same tax year.
• This directly reduces the profit on which you calculate income tax and Class 4 National Insurance.

Worked example: A self-employed electrician buys a new van for £28,000 in 2026/27, used 100% for business.

Because the AIA limit is so far above typical sole trader spending, almost every van, tool purchase, or piece of equipment bought by a small self-employed business qualifies for full, immediate relief.

Why vans qualify but cars don't

The distinction generally follows HMRC's established definitions used elsewhere in tax law:

• Vans — vehicles primarily designed and constructed for carrying goods, such as panel vans and qualifying pickups — are treated as plant and machinery and get full AIA treatment.
• Cars — vehicles primarily designed for carrying passengers — are excluded from AIA and instead use a separate set of rules based on the car's CO2 emissions.

Capital allowances for cars in 2026/27

Since cars sit outside the AIA, the relief available depends on the vehicle's emissions:

An electric car therefore gets relief that, in practice, feels equivalent to full AIA treatment — the entire cost can be deducted from taxable profit in the year of purchase — even though it's technically claimed as a first-year allowance rather than the AIA itself.

A petrol or diesel car, by contrast, only gets a slow writing-down allowance: 18% of the remaining balance each year, which means it can take many years to obtain relief for the full cost, and the deduction shrinks each year as the reducing balance gets smaller.

Worked example — petrol car costing £20,000, 18% writing-down allowance:

Compare this with a zero-emission car at the same price, which would give a full £20,000 deduction in year one.

Business vs private use restriction

Sole traders (unlike employees using a company vehicle, who are instead taxed on a Benefit in Kind) must simply restrict the capital allowance claim to reflect the proportion of business use.

Example: a self-employed consultant buys a car for £20,000 and estimates 70% business use based on mileage records.

• Only 70% of the relevant capital allowance (whether writing-down allowance or first-year allowance) can be claimed.
• The same 70% restriction also applies to related running costs like fuel, insurance, and servicing if claimed on an actual-cost basis rather than using simplified mileage rates.

Practical tips

• Keep a mileage log from day one if you plan to claim actual costs and capital allowances rather than mileage rates — HMRC will expect evidence of the business-use percentage.
• Time large equipment or van purchases carefully. Bringing a planned purchase forward into the current accounting year, if you have taxable profits to shelter, can accelerate valuable tax relief.
• Don't assume "electric" always means simplest. While zero-emission cars get generous first-year relief, check whether AIA (for vans) or the car rules apply before finalising a purchase decision.
• Review whether AIA is still the right claim. If your capital spending in a single year is unusually high (well into six or seven figures), you may need to consider the interaction between AIA and writing-down allowances on the excess — relevant mainly to larger businesses rather than typical sole traders.

Use the self-employed tax calculator to see how a capital allowance claim on a new van or equipment purchase changes your tax and Class 4 National Insurance bill for 2026/27.