Capital allowances are the tax system's replacement for depreciation. Depreciation in the accounts is added back when a company works out its taxable profit, and capital allowances are given instead, at rates the government sets rather than rates the directors choose. They are the largest single reason a company's tax bill differs from 25% of the profit shown in its accounts.
What you can claim on
GOV.UK puts the test simply: you can claim capital allowances on items you keep to use in your business, known as plant and machinery. That covers equipment, machinery, business vehicles, the cost of demolishing plant and machinery, parts of a building considered integral, some fixtures such as fitted kitchens and bathroom suites, and alterations to a building made to install plant or machinery. It does not cover repairs, which are claimed as an ordinary business cost instead, and the line between an alteration and a repair is where a good deal of the argument in this area sits.
Six allowances, and you choose
The annual investment allowance gives 100% of up to £1 million of qualifying spend. One hundred per cent first-year allowances give the full amount on certain assets in the year of purchase. Full expensing and the 50% first-year allowance are available to companies on qualifying investment from 1 April 2023. A 40% first year allowance applies to qualifying plant and machinery purchased after 1 January 2026. Writing down allowances cover whatever is left, and the super-deduction covers a closed window from 2021 to 2023. Where an item qualifies for more than one, the company chooses which to use.
Why the choice matters more than the total
Every route eventually gives relief for the whole cost; what differs is when. Taking 100% now suits a company with profit to shelter this year. Leaving expenditure in a pool to be written down at 14% suits a company expecting to be more profitable later, or one already at a loss. Because the small profits rate, marginal relief and the associated companies division all turn on the taxable profit figure, a capital allowances decision can move a company between rate bands rather than just reducing the tax at a fixed rate, which is worth modelling before the claim is made.
Questions people ask about capital allowances
What are capital allowances for a limited company?
Tax relief for money spent on plant and machinery kept for use in the business. They replace depreciation, which is not deductible, and are given at rates set by law rather than by the company.
How much can a company claim?
The annual investment allowance covers up to £1 million of qualifying spend at 100%. Full expensing gives companies 100% on qualifying main-rate plant and machinery from 1 April 2023, and writing down allowances cover the rest.
Do capital allowances reduce the corporation tax rate?
They reduce the taxable profit the rate is applied to, and because the rate bands turn on that figure, a large claim can move a company from the main rate into marginal relief or the small profits rate.