When a business buys equipment, machinery, vans or computers, the cost is not deducted from profits in the usual way. Tax relief comes through capital allowances instead. For most small and medium-sized businesses, the allowances available mean the full cost can be deducted in the year of purchase.
The main exception is cars, which get slower relief. The timing of a purchase, and whether you trade as a company or as a sole trader, also affect how much relief you get and when.
The Annual Investment Allowance
The Annual Investment Allowance gives a 100 percent deduction for up to £1m a year of spending on plant and machinery. It is available to companies, sole traders and partnerships, and covers both new and second-hand assets.
It covers most equipment, tools, machinery, vans, lorries, furniture and computers, as well as integral features of buildings such as electrical and heating systems. It does not cover cars. Groups of companies share a single allowance.
Full expensing and first-year allowances
Companies can also claim full expensing, a 100 percent first-year allowance on new and unused main-rate plant and machinery, with no upper limit. New special rate assets, such as integral features and long-life assets, get a 50 percent first-year allowance. Second-hand assets do not qualify, but the Annual Investment Allowance covers them.
From 1 January 2026, there is a new 40 percent first-year allowance for main-rate expenditure. It is available to unincorporated businesses and for assets bought for leasing, which full expensing does not cover. It does not apply to cars. In practice, it matters most where spending exceeds the £1m Annual Investment Allowance.
Writing down allowances
Anything not covered by the above goes into a pool and is relieved gradually:
- The main pool is relieved at 14 percent a year, reduced from 18 percent from 1 April 2026 for companies and 6 April 2026 for unincorporated businesses.
- The special rate pool is relieved at 6 percent a year.
- If a pool balance falls to £1,000 or less, it can be written off in full.
Cars
Cars never qualify for the Annual Investment Allowance or full expensing. New zero-emission cars get a 100 percent first-year allowance, extended to March 2027. Other cars go into the main pool at 14 percent a year if CO2 emissions are 50g/km or less, or the special rate pool at 6 percent if above. Double cab pick-ups have been treated as cars for capital allowances since April 2025.
A worked example
A company with profits in the 25 percent band buys:
- A new machine for £60,000
- A second-hand van for £20,000
- A new petrol car for £30,000 with emissions above 50g/km
The machine qualifies for full expensing and the van for the Annual Investment Allowance, giving £80,000 of relief in year one, worth £20,000 in tax. The car goes into the special rate pool, giving an allowance of £1,800 in year one, worth £450 in tax. The rest of the car's cost is relieved slowly over many years.
Had the company bought a new electric car instead, it could have claimed the full cost in year one.
Timing and selling assets
Allowances are generally given for the period in which the expenditure is incurred, which is usually when there is an unconditional obligation to pay. Buying before your year end brings the relief forward by a year. For assets bought on hire purchase, the allowances can be claimed once the asset is brought into use.
When you sell an asset, the proceeds reduce the pool. If you have already claimed 100 percent relief, the sale proceeds are usually taxed as a balancing charge, so selling equipment can create taxable income.
Sole traders using the cash basis, which is the default from 2024/25, generally deduct equipment purchases directly as an expense rather than claiming capital allowances. Cars remain the exception and still need capital allowances.
What to do
- Plan large purchases around your year end, and check you have a firm commitment before it.
- Check whether an asset is new or second-hand, and whether it is main rate or special rate.
- Look at the emissions before choosing a company car.
- Keep invoices showing the date, cost and description of each asset.
If you are planning a significant purchase and would like to check the tax position first, book a free call.
