Capital allowances are one of the more straightforward tax reliefs available to limited company directors — and one of the most consistently under-used. If your company buys equipment, computers, tools, or vehicles for business use, you are almost certainly entitled to deduct part or all of the cost from your taxable profit. The Annual Investment Allowance currently covers the first £1 million of qualifying expenditure at 100%.
- Annual Investment Allowance: £1,000,000 per year (100% first-year deduction)
- Cars are excluded from AIA — they use separate capital allowance pools
- Writing-down allowance (main pool): 18% per year on reducing balance
- Zero-emission cars: 100% first-year allowance available
- Personal use reduces the claimable proportion — document the split
What are capital allowances?
When your company buys a capital asset — a computer, desk, piece of machinery, office equipment — you cannot deduct the full cost as an ordinary expense in the year of purchase (as you would a software subscription or a stationery bill). Capital expenditure must instead be claimed through the capital allowances regime, which provides tax relief in a structured way.
For most directors, the Annual Investment Allowance (AIA) means this distinction is irrelevant in practice — they can still deduct the full cost in year one. But understanding the underlying rules matters for cars, high-value assets, and timing decisions.
Annual Investment Allowance (AIA)
The AIA gives 100% first-year tax relief on qualifying capital expenditure, up to £1,000,000 per year. For the vast majority of sole directors, the entire cost of equipment bought in the accounting period can be deducted from profits before CT is calculated — the same effect as a revenue expense.
Worked example: equipment purchase year
| Purchase | Cost | AIA relief at 19% CT |
|---|---|---|
| MacBook Pro | £2,400 | £456 |
| External monitors × 2 | £700 | £133 |
| Ergonomic desk and chair | £900 | £171 |
| Specialist software (perpetual licence) | £1,200 | £228 |
| Total AIA claim | £5,200 | £988 CT saved |
All £5,200 deducted in the year of purchase. Taxable profit reduces by £5,200 — saving £988 in CT at 19% (or £1,378 at the 26.5% marginal rate).
What qualifies for AIA?
| Qualifies for AIA | Does NOT qualify for AIA |
|---|---|
| Computers, laptops, tablets | Cars (any CO2 emissions) |
| Office furniture | Land and buildings |
| Machinery and equipment | Assets leased to others |
| Specialist industry equipment | Intangible assets (use amortisation rules) |
| Fixtures in business premises | Assets used partly under hire purchase (timing rules apply) |
| CCTV, security equipment | Items bought in a period of cessation |
Cars: the separate rules
Cars are specifically excluded from AIA and instead sit in capital allowance pools, with relief spread over many years. The pool depends on CO2 emissions:
| Car type | CO2 emissions | Capital allowance treatment |
|---|---|---|
| Zero-emission electric | 0g/km | 100% first-year allowance (FYA) |
| Low emission | 1–50g/km | 18% writing-down allowance (main pool) |
| Higher emission | 51g/km+ | 6% writing-down allowance (special rate pool) |
The electric car 100% FYA makes zero-emission vehicles particularly attractive for CT purposes — the full cost is deductible in year one, matching the AIA benefit on equipment.
Company car vs mileage claim: For most directors, claiming mileage at 45p/mile on a personally-owned car is simpler and often more tax-efficient than a company car. The company car route triggers a benefit-in-kind charge (except zero-emission vehicles at 2% in 2026-27). Model both options before committing to a company car purchase.
Writing-down allowances (WDA)
For assets not claimed under AIA (or the residual balance after AIA is used), writing-down allowances apply on a reducing balance basis:
| Pool | WDA rate | Typical assets |
|---|---|---|
| Main pool | 18% per year | Most equipment, low-emission cars |
| Special rate pool | 6% per year | Long-life assets, integral features, high-emission cars |
| Single asset pool | 18% or 6% | Assets with significant private use (one asset per pool) |
WDA is calculated on the reducing balance — so an asset in the main pool at £10,000 gets £1,800 relief in year 1, £1,476 on the remaining £8,200 in year 2, and so on. It takes many years to fully write off. This is why AIA (100% in year 1) is so much more valuable where it applies.
Timing: buy before or after year-end?
AIA is claimed in the accounting period in which the expenditure is incurred. If you need new equipment and are approaching your year-end, buying before year-end pulls the full CT deduction into the current period — potentially saving tax payable in 9 months. After year-end, the relief waits until the following CT bill.
Example: timing difference at 19% CT
| Scenario | CT relief timing | Cash benefit timing |
|---|---|---|
| Buy £5,000 equipment 1 week before year-end | This CT period | ~9 months after year-end |
| Buy £5,000 equipment 1 week after year-end | Next CT period | ~21 months after year-end |
For £5,000 at 19% CT, the difference in cash benefit timing is approximately £950 arriving 12 months earlier. Worth planning if you need the equipment anyway.
Personal use restriction
If an asset is used partly for business and partly personally, capital allowances are restricted to the business use proportion. An asset used 70% for business gets 70% of the allowances. This asset must be tracked in a single-asset pool to apply the personal use restriction correctly — it cannot be pooled with other assets.
Disposal and balancing charges: When you sell or dispose of an asset on which you have claimed capital allowances, HMRC may recover some relief via a balancing charge (if you sell for more than the tax written-down value) or grant additional relief via a balancing allowance (if you sell for less). Always inform your accountant of disposals, especially in the year you cease trading.
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Frequently asked questions
Can I claim AIA on a car?
Does the timing of purchase matter for AIA?
What if I buy an asset and also use it personally?
Can I claim AIA on software?
What is the £1m AIA limit in practice for sole directors?
Important: This guide is for general information only and does not constitute tax or legal advice. Tax rules change — always verify current rates and thresholds with HMRC or a qualified accountant before making decisions.