Capital allowances and full expensing explained

Capital allowances are one of the main ways the tax system supports business investment, and they can make a real difference to your cash and growth plans. When you add newer terms like full expensing and first year allowances, it can sound even more confusing.

For UK limited companies, especially owner managed businesses and fast growth start-ups, understanding capital allowances and full expensing is worth the effort. Get it right and you can significantly reduce your Corporation Tax bill and free up cash to reinvest in growth.

Here at Agile Accountants we work with limited companies across the UK to plan capital expenditure, claim reliefs correctly and avoid leaving money on the table. This guide sets out what you need to know about capital allowances in 2026 and beyond.

Capital allowances and full expensing in a nutshell

Capital allowances are the tax system’s way of giving you relief on the cost of assets that your business will use over several years, such as equipment, computers, machinery and certain fixtures. Instead of claiming the whole cost as a normal expense, you claim it through capital allowances.

For most UK businesses, the main types of capital allowances now include:

• Plant and machinery allowances on equipment and machinery
• Annual Investment Allowance that often gives 100% relief up to a set limit
• First year allowances, including full expensing for companies
• Writing down allowances where relief is spread over several years

From April 2023, companies within Corporation Tax can claim full expensing on qualifying new main rate plant and machinery, and a 50% first year allowance on many special rate assets. This was originally temporary but is now being made permanent in legislation.

Alongside this, Annual Investment Allowance has been permanently set at £1,000,000 per year, which is more than enough for most small and medium sized businesses.

From 1 January 2026 a new 40% first year allowance for certain main rate expenditure has been introduced, with fewer restrictions than many other first year allowances. It is designed to help where AIA or full expensing are not available, including for some assets used for leasing and some unincorporated businesses.

If you want to dive into the official detail, HMRC’s capital allowances and full expensing guidance on GOV.UK is a great starting point.

Key types of capital allowances for UK limited companies 

Annual Investment Allowance (AIA) 

Annual Investment Allowance is one of the most useful tools in the capital allowances toolkit. It normally gives 100% tax relief in the year of purchase on qualifying plant and machinery, up to an annual limit. That limit is currently set at £1,000,000 and has been made permanent, which gives welcome certainty for future planning.

For owner managed companies and fast growth start-ups, AIA often covers the bulk of your routine investment in items such as:

• IT equipment and phones
• Office furniture and fittings
• Tools, manufacturing equipment and machinery
• Some integral features within business premises

Full expensing and other first year allowances 

For companies, full expensing is now the flagship capital allowances relief for new plant and machinery. It allows a 100% first year deduction for qualifying main rate expenditure, with a 50% first year allowance for many special rate assets.

In simple terms, this means:

• You can often deduct the full cost of new, qualifying main rate equipment from your taxable profits in the year you buy it
• You may get 50% upfront relief on qualifying special rate assets, with the balance going into the normal pool for writing down allowances

Key points to remember about full expensing:

• It applies to companies within Corporation Tax, not individuals or partnerships directly
• Assets usually need to be new and unused, and not bought for most leasing activities
• Cars are generally excluded, although there are separate reliefs for zero emission cars

In addition, from 1 January 2026 a new 40% first year allowance will be available for certain main rate assets where existing first year allowances or AIA are not available or not preferred, for example some leased assets and assets held by unincorporated businesses.

Writing down allowances 

Where you do not claim, or cannot claim, AIA or full expensing, expenditure usually goes into a capital allowances pool and you claim writing down allowances each year at set rates. This is the more gradual, traditional way of getting tax relief for capital expenditure.

From 1 April 2026 for companies, and 6 April 2026 for businesses within Income Tax, the main rate of writing down allowance on the main pool is scheduled to reduce from 18% to 14%. The special rate pool remains at 6%.

For many of our clients in Birmingham and across the UK, a mix of AIA, full expensing, the new 40% first year allowance and writing down allowances is used in different years, depending on investment levels and profit planning.

Capital allowances planning for 2026 and beyond 

With full expensing now a permanent feature of the regime and AIA fixed at £1,000,000, the focus has shifted from short term incentives to long term investment planning.

For 2026, director owners should be thinking about:

Timing of major purchases

If you are planning significant investment in plant, machinery or technology, map this alongside forecast profits so that you use reliefs in the most tax efficient way. For example, bringing forward or deferring a purchase could move relief between tax years with different Corporation Tax rates or profit levels.

Choosing between AIA, full expensing and other allowances 

Often the answer will be to use whichever gives immediate relief and keeps things simple. In many cases that will be AIA or full expensing. In some situations, you may choose to:

• Use the new 40% first year allowance where AIA or full expensing is not available
• Spread allowances over several years via writing down allowances to smooth reported profits and maintain banking covenants

Integrating capital allowances with wider tax planning 

Decisions on salaries, dividends, pension contributions and borrowing all interact with capital allowances. For example:

• A large capital allowances claim could reduce current year tax but may also reduce distributable reserves
• Timing pension contributions or bonus payments alongside major investment could help manage overall tax rates across several years

Keeping good records 

HMRC guidance on capital allowances emphasises the importance of accurate records of what you bought, when you bought it and how it is used in the business.

For fast growth start-ups, this planning is especially important where you are:

• Scaling teams
• Investing heavily in systems and equipment
• Considering external investment or exit in the medium term

Common pitfalls with capital allowances

Directors of limited companies often fall into similar traps when dealing with capital allowances:

Treating all spend as immediately deductible 

Some items that feel like everyday spending are actually capital for tax purposes and should go through capital allowances. Missing this can either reduce tax relief or create compliance risks if HMRC challenge the treatment.

Claiming on non-qualifying assets 

Land, most buildings and some types of cars either do not qualify, or have restricted relief. Structures and Buildings Allowance is separate from plant and machinery allowances, with its own rules and rates.

Ignoring special rules for cars and electric vehicles 

Cars have their own capital allowance rules, and full expensing normally does not apply to them, so they need separate attention. Zero emission cars can qualify for 100% first year allowances, but emissions thresholds and dates matter.

Poor documentation 

Inadequate descriptions on invoices or fixed asset registers make it harder to justify claims if HMRC ask questions. Clear descriptions help show why something qualifies as plant or machinery and whether it should be treated as main rate or special rate.

Not revisiting older pools 

Historic expenditure that never benefited from generous reliefs can still sit in your pools. With the main writing down allowance rate set to reduce, it is sensible to understand what is in your main pool, how long it will take to unwind, and whether any planning is possible.

Action checklist for directors in 2026 

To turn this into action, here is a simple checklist you can start on now:

1. List all significant equipment and plant purchases over the last few years and confirm how they were treated for tax.
2. Make sure your fixed asset register is up to date and clearly describes each asset, including whether it is main rate or special rate where possible.
3. Build a simple schedule of planned capital expenditure for the next 12 to 24 months, including expected costs and timings.
4. Discuss with your adviser how AIA, full expensing, the 50% first year allowance for special rate assets and the new 40% first year allowance could apply to that schedule.
5. Check how the planned reduction in writing down allowance rates from 2026 might affect your existing pools and future tax profile.
6. Factor capital allowances into your broader financial planning, including cash flow forecasts, banking requirements and Corporation Tax estimates.
7. Review your processes so that new asset purchases, disposals and upgrades are captured consistently in both your accounting records and your tax computations.

With a bit of structure, capital allowances and full expensing become a useful part of your toolkit for managing tax and funding investment, rather than a frustrating technical detail.

If you would like support putting this into practice in your own business, Agile Accountants can help you build a clear, proactive plan that aligns your tax reliefs with your growth strategy.