Capital allowances are a (horrendously) complex area of UK tax but claiming allowances wherever possible can help a business make a big dent in its tax bill. It’s an especially confusing topic because there are different types of capital allowances available, each with their own rules, claim limits, and thresholds.

Our Beginners Guide to Capital Allowances starts with the basics, so in this article we go into more detail about the types of capital allowances that are available.

What is the annual investment allowance (AIA)?

The annual investment allowance (AIA) is a way for businesses to claim tax relief on the assets they buy. You can use it to deduct the full cost of an asset’s value from your profits in the year that you bought it, rather than spreading it out over several years. Unlike most types of capital allowances, this one is available for unincorporated businesses too.

Is there a limit to how much annual investment allowance I can claim?

Yes, there is! The maximum amount that you can claim in a year has been indefinitely increased to £1,000,000 as a way of stimulating business investment. You might use it on one big mega asset, or across several.

Just be aware that you can’t use the annual investment allowance for cars, or for assets that you originally used for something else before you started using it in your business (such as a laptop).

When can I claim AIA for an asset?

You can only claim the annual investment allowance for an asset in the financial period that you bought the item. For AIA purposes, the date of purchase is either:

• The date you signed the contract if payment is due within 4 months
• When the payment is due, if it’s due more than 4 months later

What about if I’m VAT-registered?

If your business is registered for VAT, you can normally reclaim any VAT you pay on purchases. This means that you’ll claim the VAT back through your VAT return, and then the annual investment allowance on the rest.

Annual Investment Allowance (AIA) at a glance

• Deduct 100% of an asset’s value
• Claim up to £1 million in a year

What are first year allowances (FYA)?

Similar to the annual investment allowance, using first year allowances (FYA) means you can claim up to 100% of an asset’s value in the same accounting period in which you bought it. The difference is that these must be ‘qualifying’ items.

Assets that qualify for first year allowances are generally environmentally friendly items such as:

• New zero-emission goods vehicles
• New plant and machinery for use in designated areas within certain enterprise zones
• Certain new energy-saving and water-efficient equipment
• New cars with carbon dioxide emissions of 0 grams per km
• Specific new vehicle gas refuelling equipment

You can claim first year allowances in the same period that you use the annual investment allowance, but make sure you don’t claim them both on the same asset!

First Year Allowances (FYA) at a glance

• Deduct 100% of an asset’s value in the accounting period that you bought it, rather than spreading the tax relief out over a series of years
• Claim FYA as well as the annual investment allowance

What is Full Expensing (FE)?

Full Expensing (FE) is another type of first-year allowance which allows companies to deduct 100% of qualifying expenditure from their taxable profits in the year it occurs. It means that rather than spreading the tax relief out over a series of years, you can claim it all in one go. In terms of the assets that you can use it for, it’s very similar to the Annual Investment Allowance (AIA) that we mentioned earlier, but without the £1 million limit.

Originally announced as a temporary measure in Spring Budget 2023, the Autumn Statement 2023 went on to make it a permanent fixture.

What can I use full expensing for?

Whereas regular first year allowances typically focus on eco-friendly items, the new full expensing rules are more like the annual investment allowance, in that you can claim for assets which fall into the more general ‘plant and machinery’ category.

You might also hear these described as ‘main rate’ items (which we explain in more detail further on). In general, this might include assets such as:

• Office items such as computers and printers, desks and chairs
• Tools and machinery including lathes and planers, drills, or ladders
• Some types of vehicles, such as vans, lorries, and tractors, although in this case cars are not included
• Warehousing equipment, for example, forklift trucks, pallet trucks, and shelving
• Some types of fixtures and fittings, including fire alarm systems in non-residential property
• Construction equipment such as excavators and bulldozers

Only brand-new, unused items are eligible (so no second-hand purchases), and they can’t be something that were gifted to the company, or that you bought so you can lease them to someone else.

Full expensing (FE) at a glance

• Applies to different types of assets to other first year allowances
• No limit on the amount that you can claim in a year (unlike the £1 million annual investment allowance)

What is the 50% First Year Allowance for special rate items?

The Special Rate (SR) allowance can be used to claim tax relief on 50% of the asset’s value in the year that the expenditure happens. You can then claim the remaining balance of the asset’s value at a different rate of tax relief in subsequent years.

It was introduced as an alternative for assets that don’t qualify under typical ‘plant and machinery’ main rate rules, such as:

• Integral features of a building, including lifts and escalators, heating and cooling systems, air conditioning, hot and cold-water systems, electrical and lighting systems
• Solar panels
• Thermal insulation
• Cars with a higher level of CO2 emissions
• Items with a long life of at least 25 years (known as ‘long life’ items)

There isn’t a limit on how much expenditure you can claim relief on in an accounting period using this allowance, but at the moment it’s only available on purchases until 31st March 2026.

The 50% Special Rate allowance at a glance

• Use it for special rate items
• Claim 50% of the asset’s value in the year the expenditure happens
• Claim the remaining balance at a lower rate in subsequent years using writing down allowances (which we’ll explain next!)

Writing down allowances

Unlike first year allowances where you claim tax relief on the value of an asset in the period that you buy it, you can use writing down allowances to claim relief on the asset’s value over a longer period.

If you can’t use the annual investment allowance, you can use ‘writing down allowances’ instead. This might be because you’ve already used up your AIA, or because the asset doesn’t qualify for it.

With writing down allowances, assets are allocated to what HMRC calls ‘pools’. These determine the rate of allowance that the asset qualifies for. The different pools reflect the kind of wear, tear, and depreciation that an asset may suffer.
 

Working out the writing down allowance

Once you have the value of your asset and you know what pool it is in, you can work out the writing down allowance. The tax allowance is how much you can claim to offset against your profits, and the ‘written down value’ is the value of the asset, minus the allowance.
 

 
Our example assumes that you haven’t claimed first year allowances, annual investment allowances, full expensing or the special rate deduction. Claiming these on the asset cost we use in the example would mean there wasn’t a written down value left.

What is the super deduction?

The super deduction was a type of capital allowance available on purchases made before 31st March 2023. Instead of claiming 100% of an asset’s value, you can use the super deduction to claim 130%. It’s only available for:

• Organisations which pay Corporation Tax, so limited companies can use it, but sole traders and partnerships can’t
• Qualifying assets that were ‘contracted’ (using the capital allowance definition of what a purchase date is) between 1 April 2021 and 31 March 2023

Unlike the AIA which has a £1 million limit, there isn’t a cap on the super deduction. Our article explains the super deduction capital allowance in more detail.

Claiming capital allowances

You can claim capital allowances as part of your tax return – just remember to tick the option to claim so that these pages are available. We always advise that you speak to your accountant before making any purchases, so they can help you be as tax efficient as possible.

 
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