The phrase is doing more work than it looks. Capital identifies the kind of spending: money laid out on something the business will keep, as against money spent on running it day to day. Allowance identifies the mechanism: a deduction the law allows against profit, rather than an expense the business has incurred in the accounting sense. Put together they name a statutory deduction for capital spending.
Capital, and why the distinction is old
Tax law has always separated capital from revenue expenditure, and the split predates any of the current allowances. Revenue spending is consumed in earning this year's profit and is deducted from it: wages, rent, stock, electricity. Capital spending buys something enduring that will help earn profit for years, and it is not deductible at all as an ordinary expense. Without a specific relief, a company buying a machine would get no tax deduction for it ever, which is the position that capital allowances exist to correct.
Allowance, and why it is not an expense
An allowance is given by statute rather than derived from the accounts, and that is the reason it does not track depreciation. The rate is fixed in law, the timing is fixed in law, and the amount does not depend on how the company chooses to write the asset down in its books. It is deducted in computing taxable profit, which is why it appears in the tax computation rather than the profit and loss account, and why two companies with identical accounts can have quite different tax bills.
The practical meaning for a company
For a company preparing its own computation, capital allowance means the figure it takes off after adding depreciation back. Most owner-managed companies claim the annual investment allowance on nearly everything and the term never becomes complicated. It becomes complicated when a building is involved, because parts of a building are plant and parts are not, and telling one from the other is a survey rather than a bookkeeping entry.
Questions people ask about capital allowance meaning
What does capital allowance mean?
A deduction allowed by statute against taxable profit for capital spending, given in place of the depreciation charged in the accounts, which tax law disallows.
Is a capital allowance the same as an expense?
No. An expense is deducted because it was incurred in earning the profit; a capital allowance is given by law for spending that is not deductible as an expense at all.
Why is depreciation not allowed?
Because the rate and method are chosen by the business, so the deduction would vary with the accounting policy rather than with the spending. Capital allowances substitute a schedule set in law.