A Simple Guide to Capital Allowances (And What’s Changing Soon)
As we head toward the tax return deadline, I wanted to share a really simple explanation of capital allowances and some important changes that are coming in from 1 January 2026 and April 2026. I know this topic can feel complicated, but my goal is to make it easy to understand and to show how the rules apply in real situations many of you ask me about every year.
Capital allowances are just the tax relief you get when your business buys bigger or longer‑term items like vehicles, equipment, tools or machinery. Instead of claiming them as normal expenses, HMRC gives you tax relief in different ways depending on what you’ve bought. In tax, capital allowances replace accounting depreciation—you don’t deduct depreciation for tax; you claim capital allowances instead.
There are also some upcoming rule changes you should know about:
From 1 January 2026, HMRC has introduced a new 40% First‑Year Allowance (FYA) for certain main‑rate plant and machinery where other upfront allowances aren’t available. HMRC says it is designed for situations “where the £1 million AIA or existing FYAs (such as full expensing) are unavailable or not preferred” and is meant to help unincorporated businesses and leasing providers who currently cannot benefit from full expensing.
From 1 April 2026 (for companies) and 6 April 2026 (for individuals), the main writing‑down allowance rate will reduce from 18% to 14%.
These changes affect how quickly you get your tax relief, so it’s worth understanding what they mean in practice.
Full expensing is only available to companies. Sole practitioners/sole traders cannot claim full expensing; they should use AIA and writing‑down allowances (and specific FYAs where applicable
Examples to make it clearer
1) A limited company buying a new van.
A van isn’t treated as a car for capital allowances, so it counts as plant and machinery. That means the company can use full expensing, which gives 100% tax relief upfront on qualifying main‑rate plant and machinery. The Annual Investment Allowance (AIA) is another option that also gives 100% upfront tax relief on most equipment except cars. Most companies choose full expensing and keep their AIA for other purchases.
2) Buying a pool car.
Even though HMRC doesn’t charge Benefit in Kind if it meets the pool car rules, it still counts as a car for capital allowances. That means it cannot use AIA or full expensing. Instead, cars must use writing‑down allowances unless they are zero‑emission. The tax relief depends fully on CO₂ emissions: electric cars can qualify for 100% first‑year allowance, low‑emission cars (50g/km or under) use the main rate (currently 18%, moving to 14% from April 2026), and anything above 50g/km has to use the special rate of 6%.
3) A sole trader taxi driver using their car 100% for business.
Even if it’s used entirely for business, HMRC’s rules don’t change: cars never qualify for AIA, and they cannot use full expensing. Taxi drivers still use the same CO₂‑based writing‑down allowance system as pool cars. The only difference is that, because the car is 100% business use, they can claim the full allowance with no private‑use restriction.
4) Buying computers and office equipment.
Computers, laptops, printers, and similar items all count as main‑rate plant and machinery. That means you can usually get 100% upfront tax relief through AIA, since AIA covers most plant and machinery except cars. A limited company can also claim full expensing because these items are main‑rate assets.
5) Fitting out a new shop (shopfittings).
If a limited company opens a new shop and pays for shopfittings, many items count as fixtures or integral features, which fall under plant and machinery. Fixtures include things like fitted counters, shelving fixed to walls, built‑in units, CCTV systems and fire alarms. Integral features include electrical systems, lighting, heating, and air‑conditioning. The good news is that shopfitting costs typically qualify for 100% upfront relief through AIA, because AIA applies to both fixtures and integral features. If the £1m AIA limit is already used up (you get a fresh limit each accounting period, pro‑rated for shorter/longer periods), the remaining amount goes into the relevant pool depending on the type of fitting.
6) A limited company buys main‑rate plant and machinery in February 2026 to lease it out to another business. Because the asset is for leasing, the company cannot claim full expensing. If the group has already used up its £1m AIA elsewhere, the company can use the brand‑new 40% FYA to get a significant upfront deduction in year one, and then claim writing‑down allowances on the remaining 60% in later years. From 1 April 2026, those follow‑on WDAs will be at the reduced 14% main rate (for companies).
Why this matters: without the 40% FYA, the company would only have the slower annual WDA (14% from April 2026) for that main‑rate expenditure. The new 40% FYA “fills the gap” when full expensing isn’t available and AIA isn’t available or not preferred—especially relevant for assets purchased for leasing
Full expensing can only be claimed when all conditions are met: the asset must be main‑rate plant and machinery, it must be owned (not leased out), and it must be new and unused. If any of these conditions fail, full expensing is unavailable.
In those circumstances—if it’s still main‑rate qualifying spend—the 40% FYA may be available from 1 January 2026.
HMRC is very clear that AIA applies to “most plant and machinery” up to the £1 million limit, and the rules do not require the asset to be new. Second‑hand (used) machinery, tools, equipment, computers, office furniture, vans, etc., all can qualify for AIA as long as they are plant and machinery, used in the business, and not cars.
I know all of this can feel like a lot to take in, especially with the new rules coming in from 2026. But the key thing to remember is that capital allowances directly affect your taxable profit, which means they also affect your tax bill. The type of allowance that applies is determined by HMRC’s rules—it isn’t something we get to choose—but what does make a difference is whether you tell me about everything you’ve bought.
So, as you’re gathering your records for the year, please make sure you let me know about any vehicles, equipment, tools, computers, vans, plant or machinery your business has purchased. Even smaller items like laptops and office tech can qualify for relief, and these allowances can make a meaningful difference to your final tax position. You don’t deduct depreciation for tax—we claim capital allowances—so I need your full asset list to get this right.
Making sure I have the full, accurate list of assets means I can include the correct capital allowances in your tax calculations, helping you plan properly for your tax expense and avoid surprises.
If you’re unsure whether something counts as an asset, just tell me anyway—it’s always better for me to check than for something to be missed.