Business owners make investment choices every day – a new delivery van, upgraded IT hardware, an electric vehicle charging point outside the warehouse. What they may overlook is that the tax system actively rewards this spending through capital allowances for business investments. By treating certain capital costs as an expense against taxable profits, the rules accelerate cashflow and improve returns.
Yet the regime has changed repeatedly in recent years. From the permanent £1 million Annual Investment Allowance (AIA) to the Government’s headline full expensing, there are opportunities for companies and unincorporated businesses alike.
According to the Office for National Statistics, business investment dipped by 1.9% in the final quarter of 2024 but remained 1.8% higher than a year earlier (ONS, 2024). Keeping that upward momentum matters, and capital allowances for business investments can make the difference between pressing “go” on a project or shelving it. In this blog we explain how the rules work for the 2025/26 tax year, outline the main reliefs and share practical planning ideas.
What are capital allowances?
Capital allowances for business investments let you deduct qualifying capital expenditure from trading profits, reducing the income tax or corporation tax due. Instead of spreading depreciation over many years in the accounts, HMRC gives statutory deductions at set percentages or, in some cases, 100% straight away.
Capital allowances for business investments: Why they matter to SMEs
For many SMEs the tax saving is immediate. With the main rate of corporation tax at 25% for profits over £250,000, every £100,000 of qualifying spend can trim up to £25,000 from the current-year tax bill. Cash saved can be reinvested – perhaps paying suppliers quicker – and improves profit metrics for lenders.
The three main routes to relief
- First-year allowances: 100% (or 50%) deductions in the year of spend, including full expensing.
• Annual Investment Allowance: Up-front 100% deduction on up to £1 million of qualifying plant and machinery each year.
• Writing down allowances: Annual deductions at 18% (main pool) or 6% (special rate pool) on the reducing balance.
Annual Investment Allowance: £1 million permanent limit
The AIA covers most plant and machinery, new or second-hand. The £1 million ceiling was made permanent from April 2023 (HMRC, 2024). Unincorporated businesses and companies can both claim. Spend above the limit rolls into the relevant pool for writing down allowances, so it still attracts relief – just more slowly.
Timing tips:
• Year-end planning: Accelerate expenditure before your accounting date to bring forward relief.
• Group sharing: Groups of companies share a single £1 million pot. Allocate spend where it gives the biggest tax benefit.
• Mixed-use assets: Items partly used for non-business purposes will restrict the claim.
Full expensing: 100% relief until 31 March 2026
Companies within corporation tax can claim a 100% deduction on new, unused main-rate plant and machinery bought between 1 April 2023 and 31 March 2026. For special-rate assets a 50% first-year allowance applies. HM Treasury estimates the measure saves up to 25p in tax per £1 invested (HMRC, 2024).
Practical points:
• Qualifying spend: Desks, computers, production machinery, office fit-outs and vans usually qualify. Cars do not.
• Contract date vs delivery date: Relief is based on when expenditure is incurred for tax, usually the date of unconditional obligation to pay – not the invoice date.
• Leased assets: Items bought to lease to someone else are excluded from full expensing, though they may still qualify for AIA.
Writing down allowances: Steady deductions at 18% and 6%
Where first-year relief is not available, writing down allowances (WDAs) take over. As mentioned above, for 2025/26 the main rate pool stays at 18% and the special rate pool at 6% (HMRC, 2025).
Structures and buildings allowance: 3%
Although not technically plant and machinery, qualifying spend on new non-residential buildings attracts a flat 3% deduction each year over 33 ⅓ years. Claims start once the building is brought into use.
How to claim and common pitfalls
Bookkeeping:
• Keep detailed asset registers: Descriptions, costs, date incurred, pool classification and disposal proceeds later on. Talk to our dedicated tax planning team if you need support.
• Capture incidental costs: Installation fees, delivery, software licences attached to equipment – these may qualify.
Tax computations:
• Avoid overlap: If you claim full expensing on an item you cannot also claim AIA.
• Apportion correctly: If your accounting period straddles 31 March 2026, prorate the full-expensing limit.
• Balancing charges: On disposal, proceeds are usually taxable up to the amount of relief taken.
Record retention:
Keep capital allowances for business investments records safe – HMRC can open an enquiry up to six years after the end of the accounting period.
Strategies to maximise capital allowances for business investments
Quarterly reviews: Sit down with us well before year-end to forecast spend and allocate it to the most efficient allowance.
Claim interaction: Combine capital allowances for business investments with the SME R&D credit where projects involve qualifying innovation – this can create a double benefit.
Group planning: For larger groups consider whether to elect for a single asset pool on high-value items to accelerate WDAs.
Making capital allowances work for your business
A thoughtful claim can transform the payback of a new machine, factory refit or software platform. By focusing on capital allowances for business investments, you unlock cash faster than straight-line depreciation ever could.
Yet these benefits do not happen automatically. You need to match expenditure to the right relief, gather the paperwork and file an accurate claim. HMRC is increasingly data-driven – errors or over-claims risk penalties and interest. Our team lives and breathes capital allowances for business investments; we track the legislation, the guidance and the case law so you do not have to.
If you would like to review planned purchases, resolve a thorny claim or simply sense-check your fixed-asset register, we are ready to help. Call us or start a conversation through our contact page. We will make sure your next investment delivers the tax relief it deserves.