Capital allowances are tax relief for capital spending. When a business buys something it will keep and use rather than sell on, the cost is not an ordinary expense and cannot simply be deducted from profit. Capital allowances are the mechanism that gives relief for it instead, over a period the law sets, and they are available to companies, sole traders and partnerships alike.
The problem they solve
A company that buys a £30,000 machine has spent £30,000, but its accounts will not charge that against profit in one go; they will depreciate it over its useful life at a rate the directors decide. The tax system does not accept a figure the taxpayer chooses, so it disallows depreciation entirely and substitutes its own schedule. That schedule is capital allowances, and the effect is that the £30,000 does get relieved, just on the government's timetable rather than the accountant's.
What a claim is worth
The value of an allowance is the spend multiplied by the tax rate that would otherwise have applied to that slice of profit. For a company paying the 25% main rate, £100,000 of qualifying spend relieved in full is £25,000 of tax not paid this year. For a company in the marginal relief band the effective rate is higher than 25% on the top slice of its profit, which means an allowance claimed there can be worth more per pound than the same claim by a larger company.
Who can claim and on what
Any business carrying on a qualifying activity can claim on plant and machinery it keeps for use in that business. Sole traders and partnerships using the cash basis are restricted to business cars. Companies get access to full expensing and the 50% first-year allowance, which unincorporated businesses do not. There are also allowances outside plant and machinery, including structures and buildings and research and development allowances, each with its own rules.
Questions people ask about what are capital allowances
What is a capital allowance?
Tax relief for the cost of an asset a business keeps and uses, given instead of the depreciation charged in the accounts, which is not deductible for tax.
Are capital allowances the same as depreciation?
No. Depreciation is an accounting estimate the business chooses and it is added back for tax. Capital allowances are the statutory replacement, given at rates set by law.
Can a sole trader claim capital allowances?
Yes, on plant and machinery kept for use in the business. Sole traders and partnerships using the cash basis can only claim on business cars, and full expensing is available to companies only.