Capital Allowances and Corporation Tax: How to Claim Tax Relief on Business Assets

When your limited company buys equipment, vehicles, or machinery, you can't simply deduct the cost as an expense. Instead, you claim capital allowances — a system of tax relief that lets you write off the cost of capital assets against your Corporation Tax profits. Getting this right can save your company thousands of pounds every year.

This guide explains every type of capital allowance available to UK companies, which assets qualify, how to calculate each one, and exactly where to enter the figures on your CT600.

What Are Capital Allowances?

Capital allowances are the tax equivalent of depreciation. While your accountant might depreciate assets in the company accounts over their useful life, HMRC has its own system for giving tax relief on capital expenditure. The depreciation in your accounts is added back to profit for tax purposes, and capital allowances are deducted instead.

This means the amount of tax relief you get depends on HMRC's rules, not your accounting policy. For most small companies, HMRC's system is actually more generous — you can often claim 100% of the cost in year one.

Annual Investment Allowance (AIA) — £1 Million

The Annual Investment Allowance is the main relief for small and medium companies. It gives 100% tax relief on qualifying plant and machinery expenditure up to £1,000,000 per year.

For the vast majority of small companies, this is the only capital allowance you'll ever need. If your total capital purchases are under £1 million (and they almost certainly are), you can deduct the full cost immediately.

What Qualifies for AIA?

Qualifies for AIA	Does NOT Qualify
Computers, laptops, servers	Cars (any type — separate rules)
Office furniture and fittings	Land and buildings
Machinery and tools	Items not used for the business
Vans and commercial vehicles	Assets bought before trading began
Shop and restaurant fittings	Items received as gifts
Security and alarm systems	Leased assets (operating leases)
Air conditioning units
Electrical and plumbing systems

AIA Calculation Example

Your company has taxable profits of £120,000 and bought £30,000 of equipment during the accounting period.

Without AIA:

Corporation Tax at 25%: £120,000 × 25% = £30,000

With AIA:

Taxable profit: £120,000 − £30,000 = £90,000
Marginal Relief applies (profits between £50,000 and £250,000)
Effective tax: approximately £20,750
Saving: around £9,250

AIA for Short Accounting Periods

If your accounting period is shorter than 12 months, the AIA limit is proportionally reduced. For a 6-month period, your AIA limit is £500,000 (£1,000,000 × 6/12).

Writing Down Allowances (WDA)

If you don't claim AIA on an asset — or if you exceed the £1 million AIA limit — the asset goes into a capital allowances pool and you claim Writing Down Allowances each year.

There are two pools:

Pool	WDA Rate	What Goes In
Main rate pool	18% per year (reducing balance)	Most plant and machinery, cars with CO₂ 1–50 g/km
Special rate pool	6% per year (reducing balance)	Long-life assets (25+ years), integral features, thermal insulation, cars with CO₂ over 50 g/km

WDA Calculation Example

You buy a £20,000 asset and claim WDA at 18% (main pool):

Year	Opening Value	WDA at 18%	Closing Value
1	£20,000	£3,600	£16,400
2	£16,400	£2,952	£13,448
3	£13,448	£2,421	£11,027
4	£11,027	£1,985	£9,042

The reducing balance method means you never fully write off the asset — it gets smaller each year but never reaches zero. That's where the small pools allowance comes in: once a pool drops below £1,000, you can claim the whole remaining balance.

Full Expensing (From April 2023)

Since 1 April 2023, companies can claim full expensing on qualifying new (not second-hand) plant and machinery with no annual cap:

Main rate assets: 100% first-year allowance
Special rate assets: 50% first-year allowance (known as the "50% FYA")

For small companies already covered by the £1 million AIA, full expensing doesn't add much. It's primarily useful for companies spending over £1 million on qualifying assets — mostly larger businesses.

Key difference from AIA: Full expensing only applies to new and unused assets. AIA covers both new and second-hand assets.

First-Year Allowances (FYAs)

Several specific categories of expenditure qualify for 100% first-year allowances, meaning you can deduct the full cost in year one regardless of the AIA limit:

Zero-emission cars (0 g/km CO₂) — fully electric vehicles
Zero-emission goods vehicles — electric vans and lorries
Electric vehicle charge points (until March 2025, extended to 2025 — check current status)
Energy-efficient equipment on the Energy Technology List (ETL)
Water-efficient equipment on the Water Technology List (WTL)

Cars — Special Rules

Cars never qualify for AIA. They have their own system:

CO₂ Emissions	Allowance
0 g/km (fully electric)	100% first-year allowance
1–50 g/km (low emission)	18% WDA (main pool)
Over 50 g/km	6% WDA (special rate pool)

Practical tip: If your company is buying a car, electric vehicles are dramatically more tax-efficient. A £40,000 electric car gives £40,000 of tax relief in year one. A £40,000 petrol car (over 50 g/km) gives only £2,400 of relief in year one (6% WDA).

How to Enter Capital Allowances on the CT600

Capital allowances are claimed in Box 685–695 of the CT600:

Box	What It Covers
Box 685	Total Annual Investment Allowance claimed
Box 690	Total capital allowances (all types combined)
Box 695	Balancing charges (if you sold assets for more than written-down value)

You also need to complete the capital allowances computation, which shows each pool, additions, disposals, allowances claimed, and the written-down value carried forward. This is filed alongside the CT600 as part of your tax computation.

Balancing Charges

If you sell or dispose of an asset on which you previously claimed capital allowances, and the sale proceeds exceed the written-down value in the pool, the excess is a balancing charge. This is added back to your taxable profits.

Example: You claimed AIA of £15,000 on a machine. Three years later, you sell it for £5,000. The £5,000 is a balancing charge — it increases your taxable profit by £5,000.

Balancing Allowances

Conversely, if you sell an asset for less than its written-down value, the difference is a balancing allowance — additional tax relief. If your company made a loss overall, you may also be able to carry forward trading losses to reduce tax in future years.

Common Mistakes to Avoid

1. Not Claiming Capital Allowances at All

Many directors treat equipment purchases as expenses and miss the capital allowances claim entirely. If you bought anything lasting more than a year, check whether it's a capital item.

2. Claiming AIA on Cars

Cars are never eligible for AIA. This is one of the most common errors on CT600 returns.

3. Forgetting Disposals

If you sold, scrapped, or gave away an asset during the period, you must adjust the capital allowances pool. Failing to do so overstates your allowances.

4. Missing the Claim Window

Capital allowances must be claimed in the accounting period when the expenditure is incurred. You can amend a return within 24 months of the end of the accounting period, but you can't claim retrospectively beyond that.

5. Mixing Up the Pools

Putting a special rate asset into the main pool (or vice versa) overstates or understates your allowances. Common errors include misclassifying cars by CO₂ band or putting integral features in the main pool.

File Your CT600 With Confidence

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Capital Allowances and Corporation Tax: How to Claim Tax Relief on Business Assets