Capital Allowances on Plant & Machinery

Capital allowances on plant and machinery

Annual Investment Allowance (AIA) lets most businesses deduct the full cost of qualifying plant and machinery in the year of purchase, up to £1 million a year. It has stood at that level since January 2019. Cars do not qualify; commercial vehicles such as vans generally do.

Full expensing gives companies a 100% first-year deduction on new and unused main-rate plant and machinery, with no upper limit. It is permanent, but it is for companies within the charge to Corporation Tax only, excludes cars, and excludes assets bought to lease out.

Writing down allowances cover whatever is left, written off a pool at a percentage each year rather than all at once. Together these are the plant and machinery allowances, and claiming capital allowances correctly is usually the difference between relief this year and relief spread over a decade.

What changed in 2026

Two changes are worth knowing about, because together they shift the arithmetic.

A new 40% first-year allowance

From 1 January 2026 there is a new permanent first-year allowance set at 40%. What makes it significant is who it reaches: unlike full expensing, it is available to all businesses including unincorporated ones — sole traders and partnerships — and to leasing providers, who were shut out of the earlier reliefs. Second-hand assets, cars and overseas leasing are excluded.

The main writing down allowance has been cut

The main rate writing-down allowance drops from 18% to 14% a year on a reducing-balance basis — from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax, with a hybrid rate for periods spanning the change. The special rate pool is unchanged at 6%.

The practical effect: anything that falls into the pool now unwinds more slowly than it used to. That makes AIA and the first-year allowances relatively more valuable than they were, because getting relief up front is worth more when the alternative has been slowed down.

Why this matters when you are funding the asset

This is the part that surprises people, and it is the reason it is worth a conversation before you sign anything. Buying an asset on hire purchase does not cost you the allowance. Once you bring the asset into use you can claim capital allowances on the capital cost under the contract, even though you are paying monthly. The interest element is not covered by the allowance — that is treated separately as a business expense.

So a business can, in the same year, keep its cash and still claim relief on the full cost. Leasing works differently: with an operating lease you generally deduct the rentals as they are paid rather than claiming allowances on the asset. Neither is automatically better — but they are genuinely different, and the difference is worth understanding before the paperwork is signed rather than after.

Vans, cars and the line between them

Commercial vehicles generally qualify for capital allowances as plant and machinery; cars do not qualify for AIA and are dealt with under separate rules driven by emissions. The boundary matters on double-cab pickups and car-derived vans, where the classification is not always what the seller assumes. If the vehicle sits near that line, check with your accountant before you commit.

What to send us

Tell us the asset, roughly when you need it, and whether you trade as a limited company or as a sole trader or partnership — that last point decides which of the reliefs is even available to you. We will arrange the funding and make sure the structure does not work against the relief. We do not give tax advice; your accountant confirms the position.