Capital allowances let a business deduct the cost of qualifying capital assets, such as plant and machinery, from its taxable profits. In the UK, and in several other tax systems with similar roots, accounting depreciation is not deductible for tax. The depreciation charge is added back in the tax computation, and capital allowances are claimed instead. The allowances available depend on the type of asset, the type of business and the rules in force for the period.
How capital allowances work
- Identify qualifying spend. Plant and machinery, such as equipment, IT hardware, tools and many fixtures, usually qualifies. Buildings themselves generally do not, although the UK has a separate structures and buildings allowance.
- Add back depreciation. The book depreciation charged in the accounts is removed from taxable profit.
- Claim the allowance. Deduct the available allowance, such as the AIA, a first-year allowance or a writing down allowance, for the period.
- Carry the balance forward. Any cost not yet relieved stays in a pool (the tax written-down value) and is relieved in later years.
- Deal with disposals. When an asset is sold, the proceeds (capped at cost) are deducted from the pool, which can create a balancing allowance or charge.
Main UK allowances for plant and machinery
| Allowance | Who can claim | Relief | Notes |
|---|---|---|---|
| Annual Investment Allowance (AIA) | Most businesses | 100% in year 1, up to an annual limit | Limit £1 million at the time of writing; cars excluded |
| Full expensing | Companies | 100% first-year allowance on new main-rate plant | 50% first-year allowance for new special-rate assets |
| Writing down allowance (WDA), main pool | All businesses | 18% a year, reducing balance | For spend not relieved by other allowances |
| WDA, special rate pool | All businesses | 6% a year, reducing balance | Integral features, long-life assets, some cars |
Capital allowances vs depreciation
| Item | Depreciation | Capital allowances |
|---|---|---|
| Purpose | Spread an asset’s cost over its useful life in the accounts | Give tax relief for capital spending |
| Set by | Accounting standards and your own estimates | Tax law |
| Rate | Based on useful life and method chosen | Fixed rates and limits |
| Value it produces | Net book value (carrying amount) | Tax written-down value |
Because the two follow different rules, the book and tax values of the same asset diverge. That is why asset registers keep separate book and tax views.
Deferred tax on capital allowances
When capital allowances run ahead of depreciation, which is common when the AIA or full expensing gives 100% relief in year 1, the asset's carrying amount in the accounts is higher than its tax written-down value. Under IAS 12 and FRS 102 that difference is a taxable temporary (timing) difference, and a deferred tax liability is usually recognized for it. The liability unwinds as depreciation catches up.
Common mistakes
- Claiming depreciation for tax. In the UK it is added back; claim capital allowances instead.
- Forgetting disposals. Sale proceeds must come out of the pool, or allowances will be overstated.
- Mixing pools. Special-rate assets claimed at the main rate overstate relief.
- Losing the asset detail. Without a register showing what was bought and when, claims are hard to support.
In Asetavo
UK capital allowances are one of Asetavo's eight depreciation methods, typically used on the tax profile while book depreciation runs separately. The tax pool and the book NBV are tracked side by side, with schedules exported to Excel or CSV for your accountant. See depreciation and UK capital allowances in Asetavo (Business plan), or try the free depreciation calculator.
