What are Capital Allowances?

Normally with business expenses you would claim the amounts you have paid in the tax year you made the payments in. Some items, such as vehicles and other business assets are not treated in this way and are instead claimed as capital allowances.

Capital allowances let you claim tax relief on the cost of business assets that you expect to use over several years, instead of deducting the full cost as an expense in the year of purchase. Both self‑employed businesses (sole traders/partnerships) and companies can claim them.​

What is Writing Down Allowance (WDA)

Writing Down Allowances (WDA) are the main way most plant and machinery costs are relieved over time. You usually put expenditure into one of two pools and claim a percentage of the pool each year on a reducing balance basis:

• Main rate pool. This covers most plant and machinery: 18% per year.
• Special rate pool. This covers certain assets such as higher‑emission cars, long‑life assets, integral features and thermal insulation: 6% per year.

For example, if you buy a van for £1,000 and allocate it to the main rate pool, you claim 18% (£180) in year one. The remaining £820 stays in the pool. In year two you claim 18% of £820 (£147.60, usually rounded), and so on.​

What is Annual Investment Allowance?

Annual Investment Allowance (AIA) allows you to claim 100% of the cost of qualifying plant and machinery in the year of purchase, up to a limit.

• The AIA limit is currently a permanent £1 million per accounting period.
• You cannot claim AIA on cars, but most other business plant and machinery qualifies, including many special‑rate assets.
• If you do not claim AIA on an item, the expenditure simply goes into the appropriate pool and gets WDA instead.

It is often tax‑efficient to use AIA first on items that would otherwise be in the special rate pool (6%) to accelerate relief. AIA must be claimed in the year of purchase; if you choose not to use it that year, you cannot claim it later for that item.

What are First Year Allowances?

First Year Allowances (FYA) allow 100% relief in year one for specific types of plant and machinery that meet certain environmental or policy criteria (for example, some low‑ or zero‑emission cars and certain energy‑efficient equipment).

Key points:

• Qualifying assets get 100% of their cost deducted in the year of purchase.
• There is generally no overall monetary cap on FYA, but eligibility is restricted to specific assets and time‑limited schemes.
• FYA is separate from AIA; in practice you choose the most beneficial combination for each item.

Because qualifying lists and emissions thresholds change over time, you should always check current HMRC guidance for FYA and low‑emission cars.

What is Small Pools Allowance (SPA)?

If, at the start of the period, the remaining balance in either the main pool or special rate pool is £1,000 or less, you can claim the Small Pools Allowance and write off the entire balance in that year instead of applying 18% or 6%.

The pool remains open, but its brought‑forward balance will be nil until you add new expenditure.

What about cars and capital allowances?

Cars are treated differently from other plant and machinery:

• You cannot claim AIA on cars.
• The rate and pool depend on CO₂ emissions and purchase date.
• Low‑emission or zero‑emission cars may qualify for 100% FYA, mid‑range emissions typically go into the main rate pool, and higher emissions into the special rate pool.

The specific g/km bands and thresholds have changed several times (for example, 160g/110g, then 130g/95g, then further reductions for newer periods), so for current claims you must use the latest HMRC thresholds and orders:
https://www.gov.uk/capital-allowances/vehicles-you-can-claim-for
https://www.legislation.gov.uk/uksi/2016/984/contents/made​

Other vehicles such as vans and lorries are generally treated as normal plant and machinery (main or special rate pools) rather than as “cars”.

How do you dispose of an asset?

When you sell or dispose of an asset that you’ve been claiming capital allowances on:

• You bring the disposal value (usually sale proceeds) into the relevant pool and deduct it from the pool balance.
• For pooled assets (main or special rate pools with multiple items), you normally continue claiming WDA on the remaining pool; you do not usually get a balancing allowance or charge unless there is a cessation.
• For single‑asset pools (for example, private‑use assets or some cars), or when you cease a business, you may get a balancing allowance (extra deduction) or balancing charge (extra taxable income) depending on whether the pool ends up positive or negative.

Private use on business assets

If you are a sole trader or partner and use an asset partly for private purposes (for example, a car used for both business and personal journeys), you must restrict the capital allowances to the business‑use proportion.

Example:

• Asset cost: £2,000 in the main pool, with 50% business use.
• WDA at 18% = £360.
• You claim 50% (£180) as capital allowances in your tax computation, but the full £360 is deducted from the pool, leaving £1,640 carried forward.

Assets with private use must be kept in single‑asset pools separate from the main and special rate pools so you can track their individual balances. For companies, private use by employees/directors is generally dealt with via benefit‑in‑kind rules rather than restricting the company’s capital allowances.

Choosing how much to claim

Capital allowances are not compulsory in any given year:

• You can choose to claim all, part or none of the available WDA, AIA or FYA for that year (except that if you do not use AIA in the year of purchase, you cannot use AIA on that expenditure later).
• Unclaimed allowances (other than AIA/FYA) effectively remain in the pool as part of the tax‑written‑down value and are available in future years.

This flexibility can be useful, particularly for sole traders who might not want to reduce taxable profits below their personal allowance in a low‑income year.

Normally you would:

• Claim enough allowances to reduce taxable profit (or increase a loss) where that gives you a tax benefit, and
• Consider deferring some allowances to future years if they would otherwise fall into a tax‑free band this year.

Balancing allowances and balancing charges should be brought into account when required (for example on disposal of single‑asset pools or when ceasing a business), as they effectively close off the remaining tax value of that asset.

HMRC have more in depth information on capital allowances that can be reached via this link.

If you would like any further advice or assistance on capital allowances, or tax calculations in general please do not hesitate to contact us.