Capital Allowance Rules for UK Businesses (2025/26 Tax Year)

Capital allowances remain a crucial tax relief for businesses, allowing them to deduct the cost of qualifying assets from taxable profits. For the 2025/26 tax year, businesses can take advantage of several key allowances to reduce their tax liabilities and encourage investment.

1. What Are Capital Allowances?

Capital allowances enable businesses to offset the cost of qualifying assets against their taxable profits, reducing the amount of tax they owe. These allowances apply to items such as:

• Machinery and equipment

• Business vehicles (excluding cars for personal use)

• Office furniture

• Computers and software

• Renovation of business premises in disadvantaged areas

2. Types of Capital Allowances for 2025/26

a) Annual Investment Allowance (AIA)

• Businesses can deduct 100% of the cost of qualifying assets up to £1 million in the year of purchase.

• Applies to plant and machinery, including office equipment, computers, and business vehicles.

b) Full Expensing

• Businesses can deduct 100% of the cost of qualifying plant and machinery investments in the year of purchase.

• Encourages investment in new equipment and infrastructure.

c) First-Year Allowances (FYA)

• Certain assets qualify for 100% tax relief in the first year, including energy-efficient equipment and electric vehicle charging points.

d) Writing Down Allowances (WDA)

• If an asset does not qualify for AIA or FYA, businesses can claim a percentage of the cost each year:

  • 18% per year for main pool assets (e.g., machinery).

  • 6% per year for special rate assets (e.g., integral building features).

e) Structures and Buildings Allowance (SBA)

• Businesses can claim 3% per year on the cost of constructing or renovating commercial buildings.

3. Examples of Allowances for Different Businesses

Manufacturing Business

• Can claim AIA on new machinery purchases.

• May benefit from Full Expensing for large-scale equipment investments.

Retail Business

• Can claim SBA for store renovations.

• May use WDA for shelving and display units.

Tech Startups

• Can claim AIA on computers and software.

• May qualify for R&D tax relief alongside capital allowances.

Transport & Logistics

• Can claim FYA on electric commercial vehicles.

• May use WDA for fleet maintenance costs.

4. Benefits of Claiming Capital Allowances

• Reduces taxable profits, lowering tax bills.

• Encourages investment in business growth.

• Improves cash flow by allowing deductions upfront.

• Supports sustainability through incentives for energy-efficient equipment.

Final Thoughts

Understanding capital allowances can help businesses maximize tax relief and reinvest in growth. Whether you're purchasing machinery, upgrading office equipment, or renovating premises, these allowances provide significant financial benefits.

Need help making sense of your taxes? JSC Accounting works with small businesses across the UK to keep things simple and compliant. Get in touch for a friendly chat about how we can help.

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