Understanding capital allowances as a business owner can impact your business’s tax liability and overall financial health. Acting as a form of tax relief, capital allowances allow you to deduct the cost of some assets from their taxable profits.
This extensive guide explains the ins and outs of capital allowances, helping you make the most of your tax savings and the best quality decisions about business investments.
What are capital allowances?
Capital allowances are tax deductions claimable on qualifying capital expenditures. What does that mean? You cannot deduct the entire cost from your taxable income in one hit when you purchase assets for your business, such as vehicles, machinery, or equipment.
Capital allowances allow you to write off the cost of these assets over several years, reducing your taxable profits and, at the same time, minimising your tax bill.
What types of assets qualify for capital allowances?
Understanding which types of assets qualify for capital allowances is essential to ensuring you don’t claim against the wrong kind of assets or miss out on tax relief.
Capital allowances generally apply to assets that provide long-term value to your business. This means they’re expected to last for more than a year.
Here are some of the most common categories of qualifying assets explained:
Machinery and equipment
Most businesses include machinery and equipment essential for the business operation. These include:
- Computers
- Printers, photocopiers and other office equipment
- Manufacturing equipment
- Tools and specialised machinery
Fixtures and fittings
Fixtures and fittings include items permanently installed in your premises that you’ve purchased yourself. For example:
- Air conditioning systems and heat pumps
- Electrical systems
- Plumbing installations
- Kitchen installations
Buildings and premises
Office, commercial, or manufacturing buildings rarely qualify for capital allowances. However, certain building features may do. These include:
- Lifts and escalators
- Heating and cooling systems
- CCTV and security installations
Vehicles
Vehicles your business owns often qualify for capital allowances. These include:
- Cars (Be aware, these may come with restrictions on CO2 emissions)
- Vans and trucks
- Specialised vehicles (e.g. diggers, fork-lifts, tractors)
Capital allowances explained: Annual Investment Allowance (AIA) and Super Deduction
Knowing which assets qualify for capital allowances is helpful. However, understanding which of two recent schemes can boost tax efficiency through capital allowances is key to reducing taxable profits and liabilities.
They are the Annual Investment Allowance (AIA) and Super Deduction.
Annual Investment Allowance
The AIA allows your business to deduct the full cost of plant and machinery up to a specified limit in the same year as it was purchased.
As of 2025, this limit stands at £1million, offering substantial tax savings for businesses investing in new assets and aiming to take their operations to the next level.
Super Deduction
The Super Deduction was introduced as a temporary measure offering enhanced capital allowances for investments made between 1st April 2021 and 31st March 2023.
Under the Super Deduction scheme, businesses could claim:
- 130% relief on qualifying main rate plant and machinery investments in the first year.
- 50% for special rate assets in the first year.
This Super Deduction scheme illustrates how government policies impact capital allowances and tax planning. Liaising with a tax expert can help you ensure your business maximises its tax savings.
Real-world examples of tax savings
Here are a few real-world examples illustrating the impact of capital allowances:
1. New manufacturing equipment
Your business invests £750,000 in new machinery to aid manufacturing output. You can deduct the full £750,000 from your taxable profits in the same year as purchase using the AIA.
Assuming a corporation tax rate of 19%, your business could save £142,500 in tax that year
2. Office renovation
Your offices have seen better days, so you invested £150,000 on a complete office refurbishment. This includes a new HVAC system, lighting, and an electrical overhaul.
Many of these items qualify for capital allowances, meaning your business could save £28,500 using the AIA by deducting the full £150,000 from taxable profits.
3. New vehicle purchases
Your business purchases a new car for £50,000. However, its CO2 emissions exceed 110g/km. This means the car qualifies for the special rate pool, allowing you to claim an 8% allowance.
This allows your business to claim £4,000 as a capital allowance, resulting in a tax saving of the same amount.
How ASD Accountants can help identify and claim allowances effectively
Navigating and understanding the complexities of capital allowances is challenging. Professional tax and accounting services, such as those offered by our expert team at ASD Accountants, can prove invaluable, helping you negotiate this complex landscape and make your money work for you.
ASD Accountants is a Slough-based firm of accountants specialising in helping businesses minimise their tax liabilities. We can help you identify qualifying assets for capital allowances, helping you reduce your taxable profits and tax bills through AIA, writing down allowances, and other HMRC enquiries.
So, if you’d like to know how we can help your business make the most of your capital allowances, contact us today for a consultation and enjoy peace of mind that your tax affairs are in safe hands.
