Last updated: 18 October 2026
Capital allowances are the tax relief businesses get for spending on plant, machinery, vehicles and some building fixtures, in place of accounting depreciation. The regime changed again in 2026: a new 40% first-year allowance arrived on 1 January 2026, and the main rate of writing down allowance fell from 18% to 14% in April 2026. Here is a summary of the capital allowances regime for 2026/27, with some important tax planning points.
Writing Down Capital Allowances
What is the capital allowance rate? Expenditure that is not covered by the annual investment allowance or a first-year allowance goes into a pool and gets writing down allowances (WDAs) each year on the reducing balance:
- Main pool: 14% from 1 April 2026 for companies and 6 April 2026 for income tax, down from 18%.
- Special rate pool: 6%. This covers integral features, long-life assets, thermal insulation, solar panels and cars with CO2 emissions over 50g/km.
If your accounting period straddles the April 2026 change, you use a hybrid rate based on the number of days before and after the change. For example, a company with a calendar-year accounting period ending 31 December 2026 uses a main pool rate of 14.99%.
Where the balance on the main pool or special rate pool is £1,000 or less, the whole amount can be claimed in one go.
Annual Investment Allowance (AIA)
Relief is given at 100% on up to £1 million a year of qualifying capital expenditure through the annual investment allowance. The £1 million limit is now permanent. The AIA is available to businesses of all sizes, including sole traders and partnerships, on plant, machinery, integral features and vans, but not cars.
The £1 million limit is shared between companies in the same group, and between businesses under common control that carry on similar activities or share premises.
The limit is reduced proportionately for accounting periods of less than twelve months.
The AIA is particularly valuable for special rate items such as integral features, which would otherwise only get 6% a year. The expenditures involved include lifts and escalators, heating systems, cold water systems, air conditioning, electrical wiring and lighting, and other plant that becomes part of the building.
Main pool plant and machinery above the AIA limit, and not covered by a first-year allowance, goes into the main pool and qualifies for the 14% writing down allowance.
Full Expensing and the New 40% First-Year Allowance
Companies paying Corporation Tax can claim full expensing: a 100% first-year allowance on new and unused main pool plant and machinery, with no upper limit. A 50% first-year allowance is available for new special rate assets. Cars, second-hand assets and assets bought for leasing are excluded.
From 1 January 2026, a new 40% first-year allowance is available for new and unused main pool plant and machinery that does not qualify for full expensing. Crucially, it is open to unincorporated businesses such as sole traders and partnerships, and to assets bought for leasing. Cars are excluded. The remaining 60% goes into the main pool.
The 100% first-year allowance for new zero-emission cars and electric vehicle charge points continues until 31 March 2027 (5 April 2027 for income tax). Loss-making companies may also be able to claim research and development tax credits for qualifying innovation spending. The old enhanced capital allowances for energy-saving equipment ended in April 2020.
Motor Vehicles
Cars do not qualify for the AIA, full expensing or the 40% first-year allowance. For cars bought new or second-hand from April 2021, allowances depend on CO2 emissions:
- New and unused zero-emission cars qualify for a 100% first-year allowance until 31 March 2027 (5 April 2027 for income tax).
- Cars with emissions of 50g/km or less (including second-hand electric cars) go into the main pool and get the 14% writing down allowance.
- Cars with emissions over 50g/km go into the special rate pool and get the 6% writing down allowance.
- Vans and other commercial vehicles are plant and machinery. They can qualify for the AIA, full expensing for companies or the 40% first-year allowance if new, and any balance gets the main pool rate. New zero-emission goods vehicles have their own 100% first-year allowance.
Cars with private use by a sole trader or partner are kept in a separate pool so that allowances can be restricted for private use. Remember that cars never qualify for the Annual Investment Allowance, whereas vans do.
Motor Vehicle Allowance
Because company cars are normally pooled, a company is unlikely to get a balancing allowance when it sells a car, since the pool continues for the life of the trade. Sole traders and partners with a private use car in a single asset pool can get a balancing allowance if the car is sold for less than its tax written-down value.
For cars leased or hired for more than 45 days, 15% of the lease or hire cost is disallowed for tax if the car’s emissions are over 50g/km.
The definition of a van matters. Broadly, a van is a goods vehicle of no more than 3,500kg, designed mainly to carry goods or burdens rather than people. It is the vehicle’s design that counts, not how it is actually used.
Double-cab pick-ups used to be accepted as vans if their payload was one tonne or more. For expenditure from 1 April 2025 for Corporation Tax and 6 April 2025 for income tax, HMRC no longer applies that payload test, and most double-cab pick-ups are treated as cars for capital allowances. Van treatment only continues where the contract was signed before those dates and the expenditure was incurred before 1 October 2025.
Transitional Periods
Where an accounting period straddles 1 April 2026 (6 April 2026 for income tax), the main pool writing down allowance is worked out using a hybrid of the old 18% rate and the new 14% rate, time-apportioned by days.
Short-life asset pools are affected in the same way and use the hybrid rate in the transitional period, then 14% after that. Short-life asset elections cannot be made for cars or special rate items.
HMRC publishes guidance on the transitional rules, including how to calculate the hybrid rate.
Planning Points
- Identify integral features, such as cold water systems, electrical wiring and lighting, in any building work or fit-out. They only get 6% a year in the special rate pool, so allocate your AIA to them first.
- If you are buying or leasing a car, choose a zero-emission model to get the 100% first-year allowance (before April 2027) and avoid the 15% lease disallowance. Cars over 50g/km only get 6% a year.
- Consider short-life asset elections for main pool assets you expect to sell or scrap within eight years. If they are disposed of within that period, a balancing allowance can accelerate relief.
- Unincorporated businesses spending more than £1 million on new plant can now claim the 40% first-year allowance on the excess, instead of just the 14% writing down allowance.
- Companies should compare full expensing with the AIA. Full expensing has no limit, but assets claimed under it trigger a balancing charge on the full sale proceeds when sold.
- Time large purchases with care. Buying just before your year end brings the allowance forward by a whole year.
- For new non-residential buildings and renovations, the structures and buildings allowance gives 3% a year on the construction cost.
The current regime is generous: most small and medium businesses can write off all their spending on plant and machinery in the year they buy it. For larger projects, get capital allowances advice early to make sure every allowance is claimed.
Disclaimer: All the information in this article on the capital allowances regime, including text and graphics, is general in nature and does not replace professional advice.
