Capital allowances explained for company directors

Why capital allowances exist

In your accounts you spread the cost of an asset over its life as depreciation. But depreciation is not an allowable deduction for corporation tax. Capital allowances replace it, giving you a defined tax deduction for spending on qualifying plant and machinery — the mechanism that turns capital spend into tax relief.

The Annual Investment Allowance

The Annual Investment Allowance (AIA) lets most businesses deduct 100% of qualifying plant and machinery spend — up to £1 million a year — against taxable profit immediately. Spend £200,000 on equipment and, within the AIA, you deduct the full £200,000 the same year rather than dribbling it out over a decade.

Full expensing and the main pools

Companies can also use full expensing for qualifying new plant and machinery, giving 100% relief in year one outside the AIA cap. Spend that does not get immediate relief goes into the main or special-rate pool and is written down at 18% or 6% a year on a reducing-balance basis.

Timing your investment

Because allowances land in the year of purchase, the timing of capital spend directly affects that year's taxable profit. Bringing a purchase forward or back by a few weeks — across a year end — can shift a large deduction between tax years. Plan investment with the tax year in mind.

Funding the investment

Capital allowances make investment cheaper after tax, but you still fund the asset up front. Asset finance or a working-capital facility spreads the cost while the allowance reduces the tax.

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