Capital Allowances and the Annual Investment Allowance

What are capital allowances?

When your company buys capital assets — equipment, machinery, computers, office furniture — you cannot deduct the full cost as an expense in the year of purchase (like a subscription cost). Instead, you claim capital allowances, which spread the deduction over time. However, the Annual Investment Allowance provides 100% first-year relief for most purchases.

Annual Investment Allowance (AIA)

The AIA allows businesses to deduct 100% of qualifying capital expenditure in the year of purchase, up to £1 million per year. For a director buying a £3,000 laptop, £2,000 monitor, and £500 software licence, all of it qualifies for AIA — a full £5,500 deduction in year one rather than spread over several years via writing-down allowances.

What qualifies?

• Computers and peripherals
• Office furniture
• Machinery and specialist equipment
• Fixtures in business premises

Cars do not qualify for AIA — they use separate capital allowance pools with different rates. Electric cars can attract a 100% first-year allowance instead.

Writing-down allowances

For assets not fully covered by AIA, writing-down allowances (WDA) apply at 18% per year for the main pool, or 6% for the special rate pool (long-life assets, integral features). Most directors will not need WDA if all purchases are within the £1m AIA limit.