Understanding Capital Allowance Rates

We have seen frequent changes to capital allowance rates and thresholds over the past two decades. These changes often reflect government priorities around stimulating investment, supporting small businesses, and driving energy efficiency. For instance, in 2008, the AIA was introduced with a limit of £50,000, designed to give small and medium enterprises immediate relief on equipment costs. The limit has since fluctuated significantly, at times dropping to as little as £25,000, before stabilising at £1 million from 2019 onwards. The super-deduction, introduced during the COVID-19 pandemic, represented an extraordinary incentive: a 130% deduction on new main pool assets purchased between April 2021 and March 2023. It aimed to encourage companies to continue investing in plant and machinery despite economic uncertainty. The subsequent introduction of Full Expensing continues this policy of front-loaded relief, but in a more simplified form. Understanding these historical changes helps businesses recognise that allowances are not static and are often influenced by wider economic policy.

Further information 

*In the Spring Budget of 2023, a provision for ‘full expensing‘ was introduced. Starting from April 2023, businesses that have eligible expenses on new plant and machinery between 1 April 2023 and 31 March 2026 can claim:

• A 100% First Year Allowance (FYA) for main rate costs (known as ‘full expensing’).
• A 50% FYA for special rate costs, which includes long-duration assets.

**Only companies can benefit from the super-deduction, which offers 130% for main rate assets. 100% for assets partially used for ring-fenced businesses and partly for eligible businesses (based on division). The super-deduction applies to eligible asset purchases made from 1 April 2021 to 31 March 2023. If you purchased the asset on or before 31 March 2023 but your accounting period ends after that date, super-deduction will be available proportionally.

***Only companies can benefit from the 50% first-year allowance available for special rate pool asset additions. This allowance was initially expected to end on 31 March 2023 but has now been extended for a further 3 years to 31 March 2026.

One of the most common questions businesses face is when to rely on AIA and when to use Full Expensing. If expenditure is under £1 million, AIA usually offers a straightforward solution, as it covers both main pool and special rate pool assets. However, where expenditure exceeds £1 million, Full Expensing becomes particularly valuable. For example, a logistics firm investing £5 million in new equipment would only receive £1 million in immediate relief under AIA, with the balance potentially written down at 18%. But under Full Expensing, the full £5 million qualifies for 100% relief in year one, an enormous tax saving. Special rate assets complicate matters slightly. While AIA covers them, if the limit is used up on other expenditures, the 50% first-year allowance provides a fallback. Businesses should also consider whether their accounting period straddles key allowance deadlines, as transitional rules can significantly impact the amount of relief available.

What is the capital cost allowance in the UK?

In the UK, the term ‘capital cost allowance’ is often used interchangeably with ‘capital allowances’. It refers to the system of tax relief available to businesses that purchase qualifying capital assets. Instead of deducting the full cost of an asset as an expense in one year, businesses use capital allowances to spread or accelerate the tax relief, depending on the type of allowance claimed. This ensures that businesses receive relief in line with the useful life or importance of the asset.

How do you calculate capital allowance in the UK?

The calculation depends on the type of allowance. For AIA and Full Expensing, it is straightforward: the full qualifying expenditure (up to the limit, if applicable) is deducted from taxable profits. For WDAs, the expenditure is allocated to the relevant pool, and a fixed percentage (18% for the main pool, 6% for special rate pool) is deducted each year on a reducing balance basis. Worked example: if £100,000 is allocated to the main pool, the first year’s allowance is £18,000 (18%). The following year, the allowance is 18% of the remaining £82,000, and so on.

What does 100% capital allowances mean?

This phrase means that the entire cost of the qualifying asset can be deducted from taxable profits in the same year the expenditure is incurred. This is typically available under AIA, Full Expensing, or certain First-Year Allowances. For example, if a company spends £250,000 on new machinery, claiming 100% allowances means it can reduce its taxable profits by the full £250,000 immediately.

What is the minimum amount to capitalise an asset in the UK?

For tax purposes, there is no statutory minimum; even small qualifying items can be included in a capital allowance claim. That said, the ‘small pools allowance’ lets businesses write off the full balance of a pool if the unrelieved expenditure is £1,000 or less, simplifying claims for minor assets.