Capital Allowances UK 2025 – A Complete Guide for Businesses
Capital allowances are one of the most valuable forms of business tax relief in the UK, enabling companies and entrepreneurs to reduce taxable profits and lower Corporation Tax or Income Tax liabilities. Instead of treating large purchases as standard expenses, capital allowances allow you to deduct part (or all) of the cost of qualifying assets from your profits before tax.
This relief applies to a wide range of assets, including:
Plant and machinery – from manufacturing equipment to IT servers.
Business vehicles – vans, lorries, and low-emission cars.
Integral building features – lifts, lighting systems, heating, air conditioning.
Fixtures – such as CCTV systems, fire alarms, or fitted kitchens.
For SMEs, high-growth firms, and investors in London and across the UK, capital allowances are more than just a tax benefit — they’re a cornerstone of modern business tax planning, improving cash flow, funding reinvestment, and creating long-term savings.
Key Capital Allowances Available in 2025
In 2025, businesses can access several powerful forms of tax relief on capital expenditure:
1. Annual Investment Allowance (AIA)
100% relief on qualifying plant and machinery purchases.
Available to all businesses — limited companies, sole traders, and partnerships.
Limit: Up to £1 million annually.
Example: A construction company in Farringdon invests £400,000 in machinery. With AIA, the full amount is deducted in year one, reducing its Corporation Tax liability by £100,000 (at the 25% rate).
2. Full Expensing (2023–2026)
Applies to new, unused plant and machinery purchased between 1 April 2023 and 31 March 2026.
Allows businesses to deduct 100% of qualifying costs from profits in the same year.
For every £1 spent, companies save up to 25p in Corporation Tax.
Example: A logistics business in Wimbledon spends £1.2m on a new vehicle fleet. With full expensing, it claims the full £1.2m in the same year, cutting its tax bill by £300,000.
3. 50% First-Year Allowance (FYA)
Applies to “special rate” assets that don’t qualify for full expensing.
Includes long-life assets and integral building features.
Provides a 50% deduction upfront, with the remainder written down in later years.
4. Writing Down Allowances (WDA)
For assets not covered by AIA or FYA.
Relief is spread across multiple years:
18% per year for standard plant and machinery.
6% per year for long-life assets and integral features.
Example: An architecture firm invests £2m in new studio facilities. £1m qualifies under AIA, £500k under full expensing, and the remaining £500k goes into the WDA pool for ongoing relief.
Why Capital Allowances Are Vital for Business Tax Planning
For businesses generating £500k+ revenue, especially in London’s competitive markets (City, Farringdon, Wimbledon, Canary Wharf, and South West London), capital allowances provide:
Tax efficiency: Lower Corporation Tax and protect margins.
Cash flow support: Immediate relief through AIA and full expensing.
Investment growth: Incentivises reinvestment into technology, infrastructure, and equipment.
Strategic planning: Allows companies to align expenditure timing with tax efficiency strategies.
This is why chartered accountants in London, such as CIGMA Accounting, integrate capital allowances into bespoke corporate tax planning solutions for both SMEs and high-net-worth entrepreneurs.
Other Capital Allowances Beyond Plant & Machinery
Capital allowances aren’t limited to machinery and vehicles. Additional reliefs include:
Structures & Buildings Allowance (SBA) – 3% relief annually on non-residential properties.
R&D Capital Expenditure – linked to innovation and development.
Energy-efficient or green investments – enhanced reliefs for sustainable businesses.
Intellectual property, patents, and know-how – valuable for tech firms and high-growth companies.
Why Businesses Should Act Now
With Corporation Tax fixed at 25% and HMRC scrutiny on tax planning tightening, businesses should not leave capital allowance claims until year-end. Strategic allocation — between AIA, full expensing, and WDAs — can save companies hundreds of thousands of pounds each year.
At CIGMA Accounting, with offices in Farringdon and Wimbledon, we specialise in capital allowances planning as part of our wider business tax advisory services for UK SMEs, high-net-worth individuals, and scale-ups.
1. Overview — What Are Capital Allowances?
Capital allowances are a form of UK tax relief that enables businesses to offset qualifying capital expenditure against taxable profits. Instead of treating large purchases as immediate expenses, the government allows companies to deduct part or all of the cost of long-term business assets — reducing Corporation Tax or Income Tax liabilities.
This relief is crucial for businesses of all sizes, from scale-ups in London’s tech sector to professional practices in Farringdon and Wimbledon, as it directly impacts cash flow, reinvestment opportunities, and long-term growth.
What Can You Claim Capital Allowances On?
Plant & Machinery → IT systems, manufacturing equipment, specialist tools.
Business Vehicles → lorries, vans, and approved zero-emission cars.
Integral Building Features → heating, air-conditioning, lighting systems, and lifts.
Fixtures & Fittings → fire alarms, security systems (CCTV), fitted kitchens in commercial premises, shop refurbishments.
Why It Matters
Capital allowances are not just a compliance exercise; they are a strategic tax planning tool. Claiming correctly can:
Reduce taxable income immediately (via Annual Investment Allowance and Full Expensing).
Improve cash flow for SMEs and scale-ups.
Support property investors and landlords refurbishing commercial spaces.
Allow high-net-worth individuals (HNWs) with property portfolios or family investment companies (FICs) to achieve long-term tax efficiency.
Relevance to London Businesses
In areas like Farringdon and Wimbledon, where companies often invest in modern IT systems, creative studios, medical equipment, and property refurbishments, capital allowances offer a powerful way to optimise tax bills while supporting reinvestment.
Whether you are a tech startup in Shoreditch, a law firm in Farringdon, or a family office investing in London property, capital allowances can significantly reduce your effective tax rate.
2. Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) is one of the most valuable forms of capital allowances for UK businesses. It provides a 100% deduction on qualifying capital expenditure, enabling companies to write off the entire cost of plant and machinery in the same financial year.
Key Facts
Rate: 100% immediate deduction.
Limit: £1 million per year (permanent since 2019).
Best For: SMEs, scale-ups, and mid-sized companies with significant annual investment in equipment, vehicles, or business improvements.
What Qualifies Under AIA?
Businesses can claim AIA on most forms of plant and machinery, including:
Office IT systems, servers, and software.
Manufacturing and production machinery.
Commercial vehicles (lorries, vans, trucks).
Kitchen and catering equipment for restaurants.
Fixtures and fittings in commercial property refurbishments.
(Note: Cars and certain “special rate” assets do not qualify — these may fall under other reliefs such as WDAs or First-Year Allowances.)
Example: Real-World Application
A restaurant group in Wimbledon invests £300,000 in a new kitchen, refrigeration units, and extraction systems.
With AIA, the full £300,000 is deductible in year one.
At a 25% Corporation Tax rate, this translates to a £75,000 tax saving in that accounting period.
Without AIA, the business would only deduct a fraction via Writing Down Allowances — delaying the tax benefit and reducing cash flow efficiency.
This immediate relief helps businesses reinvest faster, whether into additional staff, expansion, or technology upgrades.
Why It Matters for London Businesses
Tech Startups in Farringdon → Claim complete relief on servers, workstations, and development equipment.
Healthcare & Dental Practices in Wimbledon → Deduct costs of medical machinery and digital imaging systems.
Creative Agencies in Shoreditch → Offset investment in studio equipment, editing suites, and lighting rigs.
Property Investors → Claim AIA on refurbishments of commercial properties, boosting post-tax returns.
3. Full Expensing & 50% First-Year Allowance (FYA)
In April 2023, the UK Government introduced Full Expensing as a temporary but highly generous capital allowance measure, designed to stimulate business investment. Running until 31 March 2026, it allows companies to deduct the full cost of new plant and machinery immediately, rather than spreading deductions over several years.
This is a game-changer for scale-ups, logistics firms, tech companies, and professional practices across London, offering significant upfront tax savings.
Key Features
Full Expensing (FE)
100% deduction in the year of purchase.
Applies to new and unused plant and machinery.
No expenditure limit (unlike the £1m AIA cap).
50% First-Year Allowance (FYA)
Applies to “special rate” assets, including integral building features.
Deduct 50% of the cost upfront, with the balance going into the special rate pool (6% WDA).
What Qualifies?
Full Expensing → office IT systems, production machinery, commercial vehicles, robotics, AI-driven automation, warehouse equipment.
50% FYA → integral features such as heating, air-conditioning, lifts, escalators, electrical systems, and solar panels.
Example: Real-World Impact
A London logistics company invests £2 million in:
A new fleet of delivery vehicles.
Automated warehouse equipment.
With Full Expensing, the entire £2m is deductible in year one.
At the 25% Corporation Tax rate, this equals a £500,000 tax saving immediately.
Without Full Expensing, the deduction would take years via Writing Down Allowances, slowing cash flow and expansion potential.
Why It Matters for London Businesses
Tech Scale-Ups in Farringdon → Immediate relief on major investment in servers, cloud infrastructure, and AI hardware.
Law & Financial Firms in the City → Claim upfront on new IT systems, cyber-security networks, and office refits.
Healthcare & Clinics in Wimbledon → Deduct medical imaging and diagnostic equipment in full.
Property Developers → Use 50% FYA on integral building features during refurbishments or new builds.
4. Writing Down Allowances (WDA)
While the Annual Investment Allowance (AIA) and Full Expensing deliver immediate tax savings, not every purchase qualifies for those reliefs. That’s where Writing Down Allowances (WDA) come in. WDAs let you claim tax relief gradually, spreading the cost of qualifying assets over several years.
This ensures businesses can still benefit from deductions even when they:
Exceed the £1m AIA limit.
Invest in used or second-hand assets (which don’t qualify for Full Expensing).
Purchase special rate assets such as long-life equipment and integral building features.
WDA Rates
18% – Main Rate Pool
Standard plant and machinery, including most office equipment, IT systems, and commercial vehicles.6% – Special Rate Pool
Long-life assets (lasting 25+ years), integral features (heating, air-conditioning, lifts, electrical systems), and thermal insulation.
Example: Real-World Application
A London-based infrastructure company invests £2.5m in energy-efficient plant and machinery for a new warehouse project.
The first £1m qualifies for AIA (100% deduction in year one).
The remaining £1.5m is split into pools:
£1m into the main rate pool (18%) → £180,000 deductible in year one.
£500,000 into the special rate pool (6%) → £30,000 deductible in year one.
Relief continues year after year, steadily reducing taxable profits over time.
While slower than AIA or Full Expensing, WDAs provide a reliable, long-term tax relief mechanism that supports businesses with ongoing investment strategies.
Why WDAs Matter for London Businesses
Property Investors in Wimbledon → Spread costs of integral building refurbishments (lighting, lifts, insulation).
Engineering Firms in Farringdon → Deduct heavy machinery and long-life infrastructure over time.
HNW Family Investment Companies (FICs) → Use WDAs strategically when refurbishing commercial property portfolios.
Professional Services Firms in the City → Offset the cost of IT upgrades and office fit-outs that exceed the AIA cap.
Strategic Tip: AIA, Full Expensing, and WDAs often work in combination. By carefully allocating expenditure across the right pools, businesses can balance immediate tax savings with long-term efficiency.
5. Other Key Allowances
Beyond AIA, Full Expensing, and WDAs, several other allowances can deliver significant tax savings for businesses, property investors, and high-net-worth individuals. These often apply to specialised assets, sustainability projects, and long-term investments — areas where careful planning with a specialist tax advisor in London can make all the difference.
Business Cars
100% First-Year Allowance (FYA): Available for new zero-emission cars — highly attractive for businesses switching to electric fleets.
18% WDA: For standard business cars with CO₂ emissions up to 50g/km.
6% WDA: For higher-emission cars.
Example: A City-based consultancy investing in a fleet of electric vehicles can deduct the full cost in year one, supporting both sustainability and tax efficiency.
Structures & Buildings Allowance (SBA)
Provides 3% relief per year on qualifying expenditure for non-residential buildings and structures.
Applies to new builds, renovations, and conversions.
Relief is spread evenly over 33 years, offering predictable deductions.
Example: A property investment company in Wimbledon, developing new office space, can claim SBA on construction costs, improving long-term tax planning.
R&D Capital Expenditure
Relief available for capital assets used in research & development projects.
Can cover laboratories, testing equipment, and technology directly linked to innovation.
Often used in combination with R&D tax credits for maximum benefit.
Example: A tech scale-up in Farringdon investing in AI hardware for product development can claim relief on both the R&D spend and related capital equipment.
Heritage & Green Investments
Enhanced allowances may apply for environmentally aligned or heritage-related spending.
Includes investment in renewable energy systems, energy-efficient equipment, and conservation of listed buildings.
Ideal for HNWs with estates, family offices, or trusts seeking to combine sustainability with legacy planning.
Example: A family investment company refurbishing a heritage commercial building could qualify for both SBA and enhanced green reliefs, reducing tax while preserving asset value.
Why These Matter for London Businesses & HNWs
In London’s competitive business landscape, where firms in Farringdon’s tech hub, Wimbledon’s professional services, and the City’s financial district are constantly reinvesting, these allowances provide a layered tax strategy. By combining them with core reliefs (AIA, Full Expensing, WDAs), businesses can maximise efficiency, improve cash flow, and future-proof investments.
Strategic Tip: Many firms under-claim these reliefs because they appear “minor” compared to AIA or Full Expensing. However, over time, these allowances compound into six- and seven-figure tax savings — especially for property-heavy businesses and HNW investors.
6. Why Capital Allowances Matter in 2025
With Corporation Tax now at 25%, businesses can no longer afford to overlook capital allowances. Every qualifying pound spent on equipment, property refurbishments, or vehicles directly reduces taxable profits — translating into substantial, real-world tax savings.
Key Reasons Capital Allowances Are Critical in 2025
1. Corporation Tax Savings at 25%
A £1m investment can generate up to £250,000 in tax relief when structured correctly.
For HNWs and family offices, capital allowances can make the difference between efficient growth and unnecessary tax leakage.
2. Improved Cash Flow
Immediate relief through AIA and Full Expensing accelerates deductions, keeping liquidity within the business.
This is particularly important for scale-ups reinvesting profits into expansion, technology, and hiring.
3. Growth & Strategic Planning
Capital allowances are not just about compliance; they are a strategic tool for scale-ups, private equity-backed firms, and international investors.
For businesses with revenues above £500k, optimising allowances ensures profits are reinvested efficiently, supporting long-term growth.
The London Advantage
In 2025, CIGMA Accounting Ltd — with offices in Farringdon and Wimbledon — is positioned as a boutique firm specialising in capital allowance optimisation as part of bespoke business tax planning in the UK.
Farringdon: Supporting tech startups, scale-ups, and creative agencies investing heavily in IT infrastructure and innovation.
Wimbledon: Advising professional practices, property investors, and HNW individuals on maximising property and equipment-related claims.
By combining capital allowances with wider strategies such as Trusts, Family Investment Companies (FICs), EMI schemes, and R&D tax reliefs, CIGMA ensures clients achieve both immediate tax efficiency and long-term wealth preservation.
Strategic Insight: In a high-tax environment, capital allowances are no longer optional housekeeping — they are a cornerstone of intelligent tax planning. Businesses that master these reliefs gain a decisive advantage in cash flow, reinvestment, and sustainable growth.
7. Case Study — SME Manufacturing Firm
Capital allowances are not just theory — they have a direct impact on profitability, cash flow, and long-term growth. To illustrate, here’s how one London-based SME maximised its tax savings through structured capital allowance planning with CIGMA Accounting Ltd.
The Investment (2025)
A manufacturing firm in London invested £1.5 million in new plant and machinery, including:
Precision engineering equipment.
Automated assembly lines.
Upgraded IT systems for process control.
This level of investment is common among scale-up businesses with revenues over £500k, especially in London’s competitive sectors like technology, logistics, and creative industries.
The Relief Claimed
Through expert advice, the company’s expenditure was structured across multiple capital allowance routes:
£1m claimed under Annual Investment Allowance (AIA) – immediate 100% deduction.
£500k claimed under Full Expensing (FE) – introduced in April 2023 and available until March 2026, offering 100% relief on new, unused assets.
The Outcome
Total qualifying relief = £1.5m.
Corporation Tax saving = £375,000 (at the 25% rate).
Cash flow boost = Immediate, allowing reinvestment into staffing, R&D, and international expansion.
Without structured planning, at least part of this £500k could have slipped into the slower Writing Down Allowances (WDA) regime (18% or 6%), meaning tax savings would have been spread over years instead of realised upfront.
Why This Matters for London SMEs & Scale-Ups
This case study highlights a few critical insights for business owners, founders, and high-net-worth directors in London:
Cash Flow Advantage – In sectors like manufacturing, tech, and logistics, cash flow is king. By claiming upfront relief via AIA and Full Expensing, businesses accelerate ROI and retain liquidity.
Location-Specific Insight – With offices in Farringdon and Wimbledon, CIGMA has seen similar success with:
Tech startups in Farringdon are investing in AI-driven automation.
Property investors in Wimbledon are refurbishing commercial spaces with integral features.
Professional practices in the City are upgrading its IT infrastructure.
Strategic Tax Planning – By blending capital allowances with other reliefs such as R&D tax credits, EMI schemes, and Family Investment Company (FIC) planning, businesses can build a bespoke tax efficiency strategy.
8. Practical Checklist — Capital Allowances 2025
Capital allowances can deliver substantial Corporation Tax savings, but only when claims are made strategically and in line with business objectives. Use this practical checklist to ensure your business — whether a London SME, scale-up, property investor, or HNW client — maximises relief in 2025.
Annual Review of Capital Expenditure
Always review plant, machinery, and property investments annually.
Missed claims can sometimes be revisited, but proactive planning ensures no tax relief is lost.
Correct Allocation Between Reliefs
Allocate expenditure across the correct allowances:
Annual Investment Allowance (AIA) – £1m cap, 100% relief.
Full Expensing (2023–2026) – 100% relief for new, unused assets.
50% First-Year Allowance (FYA) – for special rate items.
Writing Down Allowances (WDA) – for residual and long-life assets.
This ensures you maximise upfront savings while still benefiting from long-term deductions.
Agree Fixture Values on Property Purchases
When buying or selling commercial property, ensure fixtures (e.g., heating, lighting, lifts, security systems) are formally agreed and valued.
Without this, valuable allowances can be lost forever.
Business Cars Strategy (Electric vs Non-Electric)
100% FYA is available for zero-emission vehicles, making electric fleets both tax-efficient and environmentally aligned.
Non-electric cars fall into 18% or 6% WDA pools, slowing relief.
This decision is both a financial and strategic choice for modern businesses.
Align with R&D and SBA
Combine capital allowances with R&D tax relief where equipment is used for innovation.
Don’t overlook the Structures & Buildings Allowance (SBA) at 3% annually for non-residential property investments.
Layering reliefs ensures a comprehensive tax efficiency strategy.
Timing of Large Investments
The timing of capital expenditure can dramatically affect tax savings.
Staging purchases across accounting periods may unlock optimal use of AIA and Full Expensing, particularly for businesses exceeding the £1m AIA cap.
Strategic timing is especially valuable for scale-ups, manufacturers, and professional service firms in London.
Why CIGMA Recommends This Checklist
At CIGMA Accounting Ltd (with offices in Farringdon and Wimbledon), we use this framework as part of our bespoke business tax planning service. By combining capital allowances with corporate structuring, family investment company planning, and international tax advisory, we ensure clients achieve both short-term tax relief and long-term wealth preservation.
Strategic Takeaway:
Capital allowances are not a “tick-box” compliance task — they are a core tool for financial strategy in 2025. Businesses that review, allocate, and time their investments correctly can unlock six- and seven-figure tax savings while strengthening cash flow for reinvestment.
9. FAQs on Capital Allowances (2025 Update)
Capital allowances can be complex, particularly with recent changes such as Full Expensing (2023–2026). Below are some of the most common questions asked by SMEs, scale-ups, property investors, and high-net-worth individuals in London.
Q1: Can sole traders and partnerships claim Full Expensing?
Answer:
No — Full Expensing is only available to limited companies subject to Corporation Tax.
Sole traders and partnerships must rely on the Annual Investment Allowance (AIA) and Writing Down Allowances (WDA) for relief on qualifying assets.
This makes corporate structuring an important consideration for businesses growing beyond £500k revenue.
Q2: Are cars eligible for AIA?
Answer:
No, cars are not eligible for AIA. However:
100% First-Year Allowance (FYA) is available for new electric cars (zero-emission vehicles).
Other cars qualify for WDAs — 18% pool for low-emission vehicles, 6% pool for higher-emission cars.
💡 This is why many London firms are switching to electric fleets — both for sustainability and tax efficiency.
Q3: Can I claim both AIA and Full Expensing?
Answer:
Yes — but not on the same asset.
Businesses can use AIA to cover the first £1m of qualifying spend, then apply Full Expensing for additional expenditure.
Correct allocation ensures maximum immediate relief, particularly for companies making large-scale investments in plant, machinery, or IT systems.
Q4: How do capital allowances affect Inheritance Tax (IHT) planning?
Answer:
Capital allowances don’t directly reduce Inheritance Tax. However, they play a strategic role in:
Improving corporate structuring for family businesses and Family Investment Companies (FICs).
Strengthening cash flow and retained earnings, which supports legacy planning, trust structures, and wealth preservation strategies.
For high-net-worth individuals, aligning capital allowances with IHT planning, pension reforms, and trust advisory is critical to long-term efficiency.
Why These FAQs Matter for London Businesses
Whether you’re a startup founder in Farringdon, a professional practice in Wimbledon, or a property investor managing commercial estates, understanding these FAQs ensures you make informed decisions and avoid costly mistakes.
At CIGMA Accounting Ltd, we guide clients through these nuances as part of our bespoke business tax planning UK, ensuring reliefs are strategically layered with EMI, R&D credits, FIC structuring, and international tax planning.
CIGMA’s Role — Expert Capital Allowances Advisory in London
At CIGMA Accounting Ltd, we work with businesses across London — from ambitious SMEs and startups to established companies generating £500k+ in revenue — to unlock the full value of capital allowances UK.
Our role goes beyond compliance. We help clients strategically integrate capital allowances into wider tax planning, ensuring every investment is optimised for growth, liquidity, and long-term wealth preservation.
How CIGMA Helps Clients
Maximise Capital Allowance Claims
We ensure no qualifying expenditure is missed — whether through Annual Investment Allowance (AIA), Full Expensing, First-Year Allowances, or Writing Down Allowances (WDAs).
Integrate Reliefs with Corporate Tax Planning
Capital allowances work best when aligned with corporate tax planning, EMI schemes, Family Investment Companies (FICs), R&D credits, and inheritance tax planning. We help businesses and HNW clients build a comprehensive strategy.
Ensure HMRC Compliance
Our chartered accountants and tax advisors in London prepare fully compliant claims with HMRC, reducing audit risk while safeguarding your tax reliefs.
Improve Cash Flow for Growth
By accelerating reliefs, we free up capital for reinvestment — supporting expansion, hiring, property refurbishment, or international scaling.
Why London Businesses Choose CIGMA
Farringdon Office → Serving tech startups, professional services firms, and scale-ups needing strategic cash flow support.
Wimbledon Office → Supporting property investors, family businesses, and HNWs with tailored tax structuring and inheritance planning.
Central London Reach → Advising City professionals, corporates, and private clients seeking discreet, specialist tax guidance.
With deep expertise in corporate tax advisory, high net worth tax planning, and complex relief optimisation, CIGMA positions itself as a trusted boutique alternative to high-street firms.
Strategic Takeaway:
In 2025, with Corporation Tax at 25% and economic pressures on growth, capital allowances are not just a relief — they are a cornerstone of intelligent business tax planning. Partnering with CIGMA ensures you capture every saving, strengthen cash flow, and reinvest with confidence.
