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

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?

AIA Calculation Example

Your company has taxable profits of £120,000 and bought £30,000 of equipment during the accounting period. Both the original profit and the reduced profit fall in the Marginal Relief band (between £50,000 and £250,000), so marginal relief — 3/200 of the gap to £250,000 — applies at each level.

Without AIA (profit £120,000):

• Corporation Tax at 25%: £120,000 × 25% = £30,000
• Less Marginal Relief: 3/200 × (£250,000 − £120,000) = £1,950
• Net Corporation Tax: £28,050

With AIA (profit reduced to £90,000):

• Corporation Tax at 25%: £90,000 × 25% = £22,500
• Less Marginal Relief: 3/200 × (£250,000 − £90,000) = £2,400
• Net Corporation Tax: £20,100

Saving: £7,950

The effective rate of relief is higher than 25% because the AIA claim also increases the marginal relief, compressing the tax at both ends.

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:

WDA Calculation Example

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

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, Now Permanent)

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)

A few 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) — new fully electric vehicles
• Zero-emission goods vehicles — new electric vans and lorries
• Electric vehicle charge points — the 100% FYA covered expenditure incurred up to 31 March 2026; check HMRC guidance for any extension beyond that date

Note that the old "enhanced capital allowances" for energy-saving and water-efficient equipment (the Energy Technology List and Water Technology List schemes) were abolished with effect from 1 April 2020. They are no longer available. Energy-efficient plant and machinery now gets relief through AIA or the pools like any other asset.

Cars — Special Rules

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

Practical tip: If your company is buying a car, electric vehicles are dramatically more tax-efficient. A £40,000 new 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 reduce your trading profit in the tax computation, so they are already reflected in the trading profit figure on the return. The CT600 then asks you to break down the claim by category in the capital allowances section (boxes 688–730). The key boxes are:

For most small companies, box 690 (AIA) will be the only box you need to complete.

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 and entered in the charges box for the relevant pool (for example, box 710 for the main pool or box 700 for the special rate pool).

Example: You claimed AIA of £15,000 on a machine, reducing its written-down value to nil. 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.

Related Articles

• Capital Allowances for Small Companies
• Corporation Tax Allowable Expenses: Complete List
• CT600 Box-by-Box Guide: Every Core Box Explained
• How to Reduce Corporation Tax Legally
• Electric Company Cars: Corporation Tax Benefits in 2025
• Corporation Tax on Rental Income: CT600 Guide
• Corporation Tax Year-End Planning: 12 Tips
• Corporation Tax on Goodwill & Intangible Assets

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