Capital Allowances Explained: How to Cut Your Tax Bill on Equipment

If you’ve recently bought tools, equipment, or machinery for your business, congratulations, you may be entitled to claim capital allowances and save a significant chunk of tax.

Most business owners know they can claim expenses, but few understand how capital allowances work, and that misunderstanding could be costing them thousands every year.

Let’s break it down, clearly and simply.

What Are Capital Allowances?

Capital allowances are tax deductions you can claim on assets you buy for your business that are expected to last more than a year. This includes things like:

• Equipment and machinery

• Computers and office furniture

• Vans or commercial vehicles

• Fit-out costs for commercial property

  
  

Unlike regular expenses (which go through your P&L), these items are treated as assets and go on your balance sheet. Capital allowances let you write off the cost of those assets against your taxable profit, reducing your tax bill.

Why It Matters

• ✅ Reduces your corporation tax – Capital allowances directly reduce your taxable profit, leading to lower tax bills and improved cash flow.

  
  

• ✅ Preserves and improves your cash position – Less tax paid means more cash retained, improving liquidity.

  
  

• ✅ Boosts investment confidence – You can confidently upgrade tools, vehicles, and systems knowing the cost has tax relief attached.

  
  

• ✅ Improves your balance sheet – Assets are recorded as investments, enhancing the value of your business for funding, acquisition, or shareholder review. It signals operational readiness and reinvestment in productivity.

  
  

Capital allowances support both short-term cash savings and long-term value building. They ensure your business isn’t just lean but also capable of scaling through smart capital reinvestment.

Not claiming properly means paying more tax than you need to. And worse, if you’ve never reviewed past claims, you could be missing out on rebates.

Types of Capital Allowances You Should Know

Before diving into each type, it’s important to understand the difference between the Main Pool and the Special Rate Pool:

• Main Pool: This covers most general plant and machinery, including computers, office furniture, vans, and tools. Writing Down Allowances (WDA) for main pool items are usually at 18% per year on a reducing balance basis.

  
  

• Special Rate Pool: This includes long-life assets (with a life expectancy over 25 years), integral features in buildings (like lifts, air conditioning, or electrical systems), and thermal insulation. These qualify for WDA at a lower rate of 6% per year.

  
  

Understanding which pool your asset falls into ensures the correct tax treatment and optimises your claims over time.

1. Annual Investment Allowance (AIA)

   
   

   • Lets you claim 100% of qualifying purchases (up to £1 million per year)

   • Most plant, machinery, tools, office furniture, IT equipment, and building fixtures (like lighting and heating) are eligible

   • Example: You purchase £50,000 worth of machinery — you can deduct all £50,000 from profits this year

     
     

2. First-Year Allowances (FYA)

   
   

   • 100% relief in the year of purchase for energy-saving equipment, low-emission vehicles, and electric charging points

   • Encourages businesses to invest in green, sustainable technology

   • Example: Buying an electric van or installing solar panels

     
     

3. Writing Down Allowance (WDA)

   
   

   • Used for assets not eligible for AIA or FYA

   • Deduct a portion of the asset value each year — 18% (main pool) or 6% (special rate pool, e.g. integral features)

   • Example: You spend £100,000 on warehouse infrastructure improvements and claim 6% annually

     
     

4. Structures and Buildings Allowance (SBA)

   
   

   • 3% per year over 33.3 years for qualifying construction or renovation costs on commercial buildings

   • Encourages property investment and long-term planning

   • Example: Building a new office or refurbishing an industrial unit

     
     
   
   
   
   

Real Example: Saving Through Capital Allowances

A construction firm spends £85,000 on new plant machinery and IT equipment.

• They claim 100% via AIA in the same tax year

• Their taxable profit drops by £85,000

• At 19%-25% corporation tax, that’s a tax saving of £16150 - £21,250

  
  

Without that claim, they would have paid full tax on profits and left that £16K - £21k on the table.

Risks of Getting It Wrong

• Overclaiming on personal or non-business items = HMRC penalties

• Underclaiming = Paying tax you didn’t need to

• Poor asset tracking = Missed future claims when assets are disposed of

• Delayed claims = Cash flow impact if you miss deadlines or account reviews

How Jfa Helps

At Jfa, we help you claim every pound you’re entitled to:

• Asset reviews to identify qualifying items

• Optimised use of AIA and WDA depending on profit position

• Integration with your tax planning and cash forecasting

• Advice on whether to lease or buy based on allowance impact

  
  

All starting with a free 60-minute finance health check.

Final Thought

Capital allowances aren’t just a tax trick, they’re a legitimate tool to keep more of your profits, upgrade your operations, and reinvest with confidence.

Don’t let poor advice or missed reviews cost you thousands.

Wrapping up today’s insights, tomorrow we simplify another accounting challenge