Capital Allowances: Are You Missing Tax Relief?

Every year, thousands of SMEs, contractors, and investors miss out on tax relief they’re entitled to. Capital allowances are often overlooked, yet they can reduce taxable profits by thousands of pounds.

The rules have changed in recent years—full expensing, higher allowances, and new rates now apply. If you don’t know what qualifies, you could be paying more tax than you should.

This guide explains capital allowances in plain English, covering full expensing, plant and machinery allowances, SME claims, and the common pitfalls to avoid.

What Are Capital Allowances?

Capital allowances let businesses claim tax relief on certain capital expenditure, such as equipment, machinery, or building improvements. Unlike day-to-day expenses, these costs are not deducted immediately from profits. Instead, capital allowances spread or accelerate the relief depending on the type of asset.

In practice, this means you can reduce your taxable profits—and therefore your tax bill—by claiming correctly.

For official guidance, see HMRC’s overview of capital allowances.

Full Expensing & First-Year Reliefs

Since April 2023, businesses investing in new and unused qualifying plant and machinery can claim full expensing tax relief. This means 100% of the cost can be deducted from taxable profits in the same year the asset is purchased, or 50% for special-rate assets.

For example, if you spend £200,000 on new machinery, the full amount can be set against profits immediately—cutting your corporation tax bill by up to £50,000.

Not every asset qualifies. Cars are excluded from full expensing, assets bought to lease are excluded except background plant or machinery in a building and ‘other vehicles’ (e.g., vans) can qualify if they are plant and machinery. For special rate assets, such as integral building features, a 50% First-Year Allowance (FYA) may still apply.

This relief is especially valuable for SMEs making big one-off investments. Miss it, and you could be waiting years to recover the same tax relief through slower allowances.

AIA, Plant & Machinery Allowances & Writing Down Allowances

Alongside full expensing, the Annual Investment Allowance (AIA) remains a key relief for SMEs. It allows you to deduct up to £1 million of qualifying expenditure each year—covering most plant and machinery purchases.

When the AIA or full expensing doesn’t apply, you can still claim writing down allowances (WDAs). These spread tax relief across several years:

• 18% main rate pool – for most equipment and machinery.
• 6% special rate pool – for integral building features, long-life assets, and certain cars.

Even if you don’t qualify for faster relief, WDAs make sure you still get tax savings—just spread over time.

For commercial property owners, fixtures and fittings often qualify. Our guide on capital allowances on commercial property explains how businesses can maximise claims.

Note: full expensing is available to companies within Corporation Tax. Unincorporated businesses (e.g., sole traders) cannot use full expensing and should claim via AIA or writing down allowances.

Structures & Buildings Allowance

Not all reliefs relate to machinery or equipment. The Structures and Buildings Allowance (SBA) gives relief on the cost of constructing or renovating non-residential properties.

The allowance is given at a flat 3% per year, spread evenly across 33 years (from 01/04/2020 for Corporation Tax and 06/04/2020 for Income Tax). Qualifying costs include building new offices, warehouses, or improvements to existing commercial property.

If you’re investing in premises, this relief can reduce your tax bill year after year. But it won’t apply to land, residential property, or decorative-only work.

Common Pitfalls & Missed Opportunities

Many businesses lose out on valuable tax relief simply because they misunderstand the rules:

• Mixing up eligibility – full expensing only applies to brand-new, unused assets. Used or leased equipment won’t qualify.
• Missing integral features – items like air conditioning, lifts, or lighting often qualify as special rate assets, but are overlooked.
• Failing to separate pools – putting all assets into the wrong pool can delay relief for years.
• Overlooking leased property improvements – tenants often invest in fixtures they can claim for but don’t.

Miss a claim on £50,000 worth of fixtures, and you could hand over more than £10,000 in unnecessary tax. As our guide on UK business tax reliefs in 2025 shows, small errors can add up to significant missed savings.

Capital Allowances for SMEs & Contractors

For SMEs and contractors, capital allowances can be a powerful way to reduce tax bills—but they’re often underused.

Contractors, for example, may assume only large machinery qualifies. In reality, laptops, tools, office furniture, and even certain vehicles can be claimed. Missing these claims means higher taxable profits and less cash in hand.

SMEs often make the same mistake by not linking capital expenditure with wider tax planning. Claiming allowances in the wrong year, or overlooking fixtures in leased spaces, can reduce efficiency.

We regularly help with SME capital allowance claims, ensuring nothing is missed. Our tax compliance and planning services and business strategy support help SMEs and contractors make full use of available reliefs.

How Nichols & Co Can Help

Capital allowances are a valuable but often misunderstood area of tax relief. Claim them correctly, and you could save thousands. Miss the details, and you may be giving HMRC more than you need to.

At Nichols & Co, we work with SMEs, contractors, and investors to identify qualifying expenditure, prepare accurate claims, and align allowances with wider tax planning. From accounting services to tailored tax compliance and planning, our team ensures no opportunity is missed.

If you’ve invested in equipment, property, or other assets, don’t leave money on the table. Contact us today to arrange a review of your capital allowance claims.

Capital Allowances Frequently Asked Questions

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Disclaimer: This article has been prepared by Nichols & Co to provide general information on capital allowances and related tax reliefs. It is not intended to be, and should not be relied upon as, legal or financial advice. Professional advice tailored to your circumstances should always be sought before taking action.