Guide

Capital allowances for small businesses: What you can claim in 2026/27

Learn which capital allowances your small business can claim and how the 2026/27 rate changes affect you.

Chesney McDonald–Small business & finance writer/editor. Read Chesney's full bio

Published Friday 21 August 2026

Key takeaways

Capital allowances let you deduct the cost of qualifying business assets from your taxable profits, directly reducing your tax bill. Most small businesses use the Annual Investment Allowance (AIA) to claim 100% relief on purchases up to £1 million per year.
The Writing Down Allowance (WDA) main pool rate dropped from 18% to 14% in April 2026, meaning assets not covered by the AIA are now relieved more slowly. A new 40% First Year Allowance (FYA) launched in January 2026 for main pool assets, benefiting sole traders and leasing businesses.
Sole traders and partnerships using the cash basis can only claim capital allowances on business cars. Switching to the accruals basis unlocks the full range of allowances, including AIA and the new 40% FYA.
Limited companies have access to full expensing, which provides a 100% deduction on new plant and machinery with no annual cap. This sits alongside the AIA and other allowances available to all business types.

What are capital allowances?

Capital allowances are a form of tax relief that lets you deduct the cost of qualifying business assets from your profits before you pay tax. They're the way HM Revenue and Customs (HMRC) allows businesses to account for the wear and tear of long-term purchases like vehicles, equipment, and machinery.

When you buy something for your business that you'll use over several years, you can't simply deduct the full cost as a day-to-day expense. Revenue expenses, such as rent, utility bills, and office supplies, are deducted directly from your profits. But capital expenditure on longer-lasting assets works differently.

HMRC doesn't allow you to deduct accounting depreciation from your taxable profits. Instead, capital allowances replace depreciation for tax purposes. They let you spread the tax relief over time or, in many cases, claim the full cost in the year you buy the asset.

The main types of capital allowances available to small businesses are:

Annual Investment Allowance (AIA): lets you claim 100% of the cost of plant and machinery up to £1 million per year
WDA: provides relief at a set percentage each year on the remaining value of assets
FYA: offers enhanced relief rates in the year you buy certain qualifying items
Full expensing: gives companies a 100% deduction on new plant and machinery with no cap

What can you claim capital allowances on?

You can claim capital allowances on items HMRC classifies as "plant and machinery" that you buy and use in your business. This is a broad category covering most physical assets you need to run your operations.

Qualifying assets include:

Office equipment: computers, printers, desks, chairs, and phones
Tools and machinery: workshop tools, production equipment, and factory machinery
Business vehicles: vans, lorries, and cars (cars have separate, more restrictive rules)
Fixtures and fittings: shelving, lighting, heating systems, and kitchen facilities in business premises
Building alterations: certain renovations needed to install plant and machinery, such as reinforcing a floor to support heavy equipment

The term "plant and machinery" doesn't have a precise legal definition. HMRC generally considers it to be items that function as tools of the trade rather than the setting in which the business operates. A restaurant's oven qualifies, for example, but the building itself doesn't.

Cars follow different rules from other vehicles. They're excluded from the AIA and full expensing, and they fall into different pools depending on their CO2 emissions. Vans, lorries, and motorcycles are treated as general plant and machinery.

Capital allowance rates for 2026/27

Here's a summary of the capital allowance rates applying for the 2026/27 tax year (6 April 2026 to 5 April 2027 for income tax, or accounting periods starting from 1 April 2026 for corporation tax).

AIA: Provides 100% on the first £1 million of qualifying plant and machinery per year. This is available to all business types (excludes cars).
Full expensing: Provides 100% on new, unused main pool plant and machinery. This applies to companies only, no annual cap.
40% FYA: Provides 40% on new main pool plant and machinery. This became available from 1 January 2026, including to sole traders and leasing businesses.
Main pool WDA: Provides 14% per year on a reducing balance basis. Main pool WDA was reduced from 18% from April 2026.
Special rate pool WDA: Provides 6% per year on a reducing balance basis. This rate remains unchanged.
Zero-emission vehicle FYA: Provides 100% on new zero-emission cars and electric vehicle (EV) charging points. This has been extended to 31 March 2027 (companies) and 5 April 2027 (unincorporated businesses).
50% special rate FYA: Provides 50% on new special rate pool assets. This special rate applies to companies only.
Structures and Buildings Allowance (SBA): Provides 3% straight-line per year on qualifying non-residential structures.

Annual investment allowance (AIA)

The AIA is the most widely used capital allowance for small businesses. It lets you deduct 100% of the cost of qualifying plant and machinery from your taxable profits in the year you buy it, up to a limit of £1 million per year.

The £1 million limit has been at this level since January 2019 and is now a permanent fixture of the capital allowances system. For most small businesses, this cap is more than enough to cover all qualifying purchases in a given year.

The AIA covers both new and second-hand plant and machinery. It doesn't cover cars, which have their own set of capital allowance rules. If your business is part of a group of companies or you control several related businesses, the £1 million limit is shared between them.

Worked example of AIA

Say you buy a van for £15,000 to make deliveries. Because vans are classified as plant and machinery (not cars), the full £15,000 qualifies for the AIA. You deduct £15,000 from your taxable profits in the year you buy it. If you pay tax at the basic rate of 20%, that's a tax saving of £3,000 in year one.

If your accounting period is shorter than 12 months, the AIA limit is reduced proportionally. For a six-month period, the available AIA would be £500,000.

Writing down allowances (WDA)

WDAs apply to assets that don't qualify for the AIA, full expensing, or first-year allowances. They also apply to the remaining value of assets where the cost exceeds your available AIA limit. Relief is calculated on a reducing balance basis each year.

From April 2026, the main pool WDA rate is 14% per year, down from the previous rate of 18%. The special rate pool WDA remains at 6% per year.

Assets fall into one of two pools:

Main pool: most plant and machinery, including vehicles (except cars with CO2 emissions above 50g/km), office equipment, and tools, is relieved at 14%
Special rate pool: long-life assets (expected life of 25 years or more), integral features of buildings (such as lifts, heating systems, and electrical installations), and cars with CO2 emissions above 50g/km, is relieved at 6%

Here's how the reducing balance works. Suppose you have £10,000 of unrelieved expenditure in your main pool at the start of the 2026/27 tax year.

Year one: You claim 14% of £10,000 = £1,400. The remaining pool value is £8,600.
Year two: You claim 14% of £8,600 = £1,204. The remaining pool value is £7,396.
Year three; You claim 14% of £7,396 = £1,035. The remaining pool value is £6,361.

After three years, you've claimed £3,639 in total allowances on the original £10,000. The reducing balance method means your annual claim gets smaller each year.

When you sell or dispose of an asset, you may need to make a balancing adjustment. If the sale proceeds are less than the pool value, you can claim a balancing allowance for the difference. If the proceeds exceed the pool value, you'll face a balancing charge, which adds the difference back to your taxable profits.

First-year allowances

First-year allowances (FYAs) provide enhanced tax relief in the year you buy certain qualifying assets. They offer a higher deduction than the standard WDA rate, making them valuable for businesses investing in specific types of equipment.

The main FYAs available to small businesses in 2026/27 are:

100% FYA for zero-emission vehicles: You can claim the full cost of a new zero-emission car or EV charging point in the year of purchase. This relief has been extended to 31 March 2027 for companies and 5 April 2027 for unincorporated businesses.
50% special rate FYA: Companies can claim 50% of the cost of new special rate pool assets (such as integral features of buildings) in the first year, with the remaining 50% entering the special rate pool for WDA at 6%.
40% FYA: From 1 January 2026, businesses can claim 40% of the cost of new main pool plant and machinery in the first year. The remaining 60% enters the main pool for WDA at 14%.

The 40% FYA is a significant addition for the 2026/27 tax year. Unlike full expensing, it's available to sole traders, partnerships, and leasing businesses, not just companies. It applies to new assets only and is aimed at encouraging investment across all business structures.

For a sole trader buying a £20,000 piece of machinery, the 40% FYA would provide £8,000 of relief in year one, with the remaining £12,000 entering the main pool. In practice, most sole traders spending under the £1 million AIA limit would still use the AIA (which gives 100% relief) rather than the 40% FYA. The new allowance becomes more relevant for leasing businesses or situations where the AIA has already been used up.

Full expensing

Full expensing lets companies deduct 100% of the cost of new, unused main pool plant and machinery from their taxable profits in the year of purchase. There's no annual cap, which makes it particularly useful for companies making large investments that exceed the £1 million AIA limit.

Full expensing was introduced in April 2023 to replace the temporary 130% Super Deduction. It has since been made permanent.

There are important restrictions to be aware of:

Companies only: Sole traders and partnerships can't claim full expensing. They should use the AIA, 40% FYA, or WDA instead.
New assets only: Second-hand plant and machinery doesn't qualify. The AIA covers both new and used assets if you need relief on a second-hand purchase.
Excludes cars: As with the AIA, cars have their own set of rules.
Excludes most leased assets: Assets leased out or used for the purposes of a leasing business generally don't qualify.

For qualifying special rate pool assets, a related 50% FYA is available. This gives companies a 50% deduction in the first year, with the remaining 50% entering the special rate pool for WDA at 6%.

Capital allowances for sole traders vs limited companies

The capital allowances available to your business depend on its legal structure. There are meaningful differences between what sole traders and limited companies can claim.

The biggest distinction is the cash basis restriction. If you're a sole trader or partner using the cash basis for your accounts, you can only claim capital allowances on business cars. All other asset purchases are treated as allowable business expenses and deducted from your income when you pay for them. You don't need to use the capital allowance system for non-car assets at all.

If you use the accruals basis, the full range of capital allowances opens up:

Sole traders on accruals basis: AIA (up to £1 million), WDA (14% main pool, 6% special rate), 40% FYA (from January 2026), and 100% FYA for zero-emission vehicles and EV charging points
Limited companies: everything available to sole traders on accruals basis, plus full expensing (100% on new main pool assets) and the 50% special rate FYA

For most small businesses spending under £1 million on assets per year, the practical difference is small because the AIA covers the full cost regardless. The gap widens for larger investments or when you want to claim on leased assets or special rate pool items.

Choosing between sole trader and company status involves many factors beyond capital allowances, including National Insurance, dividend taxation, and administrative costs. Capital allowances alone aren't a reason to incorporate, but they're worth understanding when you're weighing up the options.

What changed in April 2026?

Several significant changes to capital allowances took effect from 1 April 2026 (for corporation tax) and 6 April 2026 (for income tax). These changes affect how quickly you can claim tax relief on business assets.

The most impactful change is the reduction in the main pool WDA rate from 18% to 14%. This means assets in the main pool that aren't covered by the AIA or an FYA will be relieved more slowly going forward. On a £10,000 asset, the first year's WDA drops from £1,800 to £1,400.

The other key changes for 2026/27 are:

New 40% FYA: This is available from 1 January 2026 on new main pool plant and machinery.
Extended zero-emission vehicle reliefs: The 100% FYA for new zero-emission cars and EV charging points has been extended to 31 March 2027 (companies) and 5 April 2027 (unincorporated businesses).
Transitional rules: If your accounting periods straddles 1 April 2026 (or 6 April 2026 for income tax), you'll use a blended WDA rate for that period,calculated by apportioning the old 18% rate and the new 14% rate according to how many days fall on each side of the changeover.

The practical takeaway is to maximise your use of the AIA before relying on WDA. The AIA still gives you 100% relief in year one, so it should be your first port of call for qualifying assets. The WDA rate reduction only affects the portion of spending that spills over into the pools.

How to claim capital allowances

You claim capital allowances through your tax return. The process differs depending on your business structure.

Sole traders and partners claim on their Self Assessment tax return, specifically the self-employment pages (SA103 or SA103F). You'll fill in the capital allowances section with details of your purchases, disposals, and the allowances you're claiming.

Limited companies claim through their Corporation Tax return (CT600). The capital allowances are calculated as part of the tax computation that accompanies the return.

To support your claim, you'll need to keep records of:

Purchase invoices and receipts: date of purchase, description of the asset, and the amount paid
Disposal records: date of sale, sale proceeds, and details of the buyer
Business-use calculations: records of the portion of an asset used for business (you can only claim the business proportion)
Pool calculations: tracking the written-down value of each pool from year to year

Making Tax Digital (MTD) is changing how businesses keep records. MTD for VAT already requires digital record-keeping, and MTD for Income Tax Self Assessment is being rolled out from April 2026 for qualifying self-employed individuals. Keeping digital records of your asset purchases from the start makes the capital allowance calculation smoother at year-end.

If your capital allowance position is straightforward, for example, you're using the AIA to claim the full cost of a few purchases, you can handle it yourself with accounting software. For more complex situations involving multiple pools, mixed-use assets, disposals, or accounting periods straddling the April 2026 rate change, consider getting advice from an accountant.

What you can't claim capital allowances on

Not every business purchase qualifies for capital allowances. Understanding the exclusions helps you avoid mistakes on your tax return.

You can't claim capital allowances on:

Land and buildings: The purchase price of land or commercial property doesn't qualify. However, the Structures and Buildings Allowance (SBA) at 3% per year may apply to the construction or renovation costs of non-residential structures.
Personal-use items: If you use an asset for both business and personal purposes, you can only claim the business proportion. A laptop used 70% for business and 30% personally would only qualify for 70% of the capital allowance.
Stock for resale: Items you buy to sell on to customers are revenue expenses, not capital expenditure.
Revenue expenses: Day-to-day costs like rent, wages, utility bills, and office consumables are deducted directly from your profits as business expenses. They don't go through the capital allowance system.
Leased assets (for the lessee): If you lease equipment rather than buying it, the leasing company claims the capital allowances, not you. Your lease payments are treated as a revenue expense instead.

A common mistake is confusing repairs with improvements. Repairing an existing asset (such as fixing a broken machine) is a revenue expense you can deduct immediately. Improving or replacing an asset with something substantially better is capital expenditure and goes through the capital allowance system.

Keep track of your business assets with Xero

Claiming the right capital allowances starts with keeping accurate records of what you've bought, when you bought it, and how much you paid. Accounting software takes the manual effort out of that process.

Xero helps you categorise your business expenses, track asset purchases, and keep your financial records organised and ready for your tax return or your accountant. With Hubdoc, you can capture receipts and bills automatically as you go, so you're not scrambling to find paperwork at year-end.Staying on top of your records means you can claim every allowance you're entitled to without the stress of pulling everything together at the last minute.

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FAQs on capital allowances

Here are answers to some common questions about capital allowances for small businesses.

Can sole traders claim capital allowances?

Yes, but it depends on your accounting method. Sole traders using the cash basis can only claim capital allowances on business cars. Those on the accruals basis can claim the full range, including AIA, WDA, and the new 40% FYA.

What's the difference between capital allowances and expenses?

Revenue expenses, such as rent or office supplies, are deducted directly from your profits in the period you pay for them. Capital allowances are the mechanism HMRC uses to let you deduct the cost of longer-lasting business assets like vehicles, machinery, and equipment.

Do I need an accountant to claim capital allowances?

Not always. If your situation is straightforward, accounting software can help you track assets and calculate your claim. For complex scenarios involving multiple asset pools, partial business use, or disposals, an accountant can ensure you claim correctly and don't miss any reliefs.

What is full expensing and can my small business use it?

Full expensing gives companies a 100% deduction on the cost of new, unused plant and machinery with no annual cap. It's only available to limited companies. Sole traders and partnerships should use the AIA, WDA, or FYA instead.

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