When you buy equipment, vehicles or fixtures for your business, you cannot deduct the cost as a running expense. Instead you claim capital allowances. Here is how the system works for 2025/26.
Every business buys things that last: a van, a laptop, a coffee machine, a workshop full of tools. The everyday rule is that you deduct business costs from your profit before tax, but that rule does not apply to these longer-lasting items. Instead, the cost of equipment, vehicles and fixtures is relieved through a separate system called capital allowances. For any sole trader or business that owns assets, capital allowances are one of the most valuable, and most misunderstood, ways to reduce a tax bill.
The reason capital allowances exist is that accounting depreciation, the way you spread an asset's cost across its life in your accounts, is not allowable for tax. HMRC strips depreciation out of your profit and substitutes its own set of allowances at fixed rates. Capital allowances are that substitute. Get them right and a £20,000 van can knock £20,000 straight off your taxable profit in a single year.
The most common type of capital allowance is for plant and machinery, which is a far wider category than the name suggests. It covers most of what a business buys to operate:
What does not qualify as plant and machinery is the building itself, the land it stands on, and most structures. A separate allowance, the Structures and Buildings Allowance, gives relief on the construction cost of commercial buildings at 3 per cent a year, but it works differently from the plant and machinery rules covered here.
Cars are a special case. They count as plant and machinery, but they are deliberately excluded from the Annual Investment Allowance and are almost always relieved through the Writing Down Allowance instead, at a rate that depends on their CO2 emissions.
For 2025/26 the headline figures are unchanged and stable. The system has two main tools, and the order in which you use them matters.
The Annual Investment Allowance is almost always claimed first. It gives 100 per cent relief on the cost of qualifying plant and machinery in the year of purchase, up to a limit of £1 million. For the overwhelming majority of sole traders, whose annual equipment spending is nowhere near £1 million, the AIA means equipment can be written off in full immediately.
The Writing Down Allowance is what you claim when the AIA does not apply. That happens in three situations: spending above the £1 million limit, assets the AIA never covers such as cars, and balances carried forward in your pools from previous years. The WDA gives a percentage of the pool's value each year on a reducing balance.
| Allowance | Rate | When it applies |
|---|---|---|
| Annual Investment Allowance | 100% up front | Most qualifying plant and machinery, up to £1m a year |
| Writing Down Allowance (main pool) | 18% a year | Cars at 50g/km CO2 or below, spending over the AIA limit, brought-forward balances |
| Writing Down Allowance (special rate pool) | 6% a year | Integral features, long-life assets, cars over 50g/km CO2 |
Capital allowances group assets into pools rather than tracking each item separately. You add the cost of qualifying assets to the relevant pool, claim the allowance, and the remaining balance carries forward. There are three pools to know: the main pool (18 per cent), the special rate pool (6 per cent), and single-asset pools used for items with private use or a short expected life. Pooling keeps the arithmetic manageable even for a business with dozens of assets.
Any business that pays UK tax on its trading profits can claim capital allowances: sole traders, partnerships and limited companies. The rates and pooling rules are the same across all of them. Sole traders claim against their trading profits, and the allowances flow straight into the sole trader tax calculation, reducing both income tax and Class 4 National Insurance.
To claim, you record the asset, decide which allowance applies, and enter the figure in your Self Assessment return (the self-employment pages) or, for a company, the Company Tax Return. You do not need to apply in advance or notify HMRC separately. The claim is made when you file.
For sole traders there is one important rule on private use. If an asset is used partly for personal reasons, for example a car driven for both business and family journeys, the asset goes into its own single-asset pool and the allowance is restricted to the business-use percentage. A van used 90 per cent for business attracts 90 per cent of the relevant allowance; the private 10 per cent gets no relief.
Consider Priya, a self-employed furniture maker, in 2025/26. During the year she spends:
The saw, tooling and van are qualifying plant and machinery and well within the £1 million AIA limit, so Priya claims the full £32,000 under the Annual Investment Allowance. That is a £32,000 deduction against her taxable profit in the year.
The car is different. Cars never qualify for the AIA. At 110g/km it is above the 50g/km threshold, so it goes into the 6 per cent special rate pool. Because it is used 80 per cent for business, it sits in a single-asset pool, and the first-year Writing Down Allowance is £24,000 x 6% x 80% = £1,152.
Priya's total capital allowances for the year are £32,000 (AIA) plus £1,152 (WDA on the car) = £33,152. The car's pool carries forward at £24,000 minus the full 6 per cent (£1,440) = £22,560, to be written down again next year, with the business-use restriction applied each time. The sole trader calculator shows how a deduction of this size reduces taxable profit, income tax and Class 4 National Insurance together.
Capital allowances rarely sit in isolation. The order in which they apply, and how they interact with your profits, determines the final tax saving.
In most years a business uses the Annual Investment Allowance to clear current-year spending and the Writing Down Allowance to chip away at brought-forward pool balances and at assets the AIA cannot touch. Because the AIA front-loads relief and the WDA spreads it out, claiming the AIA first on the most expensive qualifying assets is usually the most tax-efficient choice.
Limited companies can also claim full expensing, which gives 100 per cent relief on qualifying new main-rate plant and machinery with no upper limit, plus a 50 per cent first-year allowance for new special rate assets. These were made permanent and sit alongside the AIA. Sole traders and partnerships cannot claim full expensing, so for the self-employed the AIA and the WDA remain the two principal tools.
Capital allowances are not compulsory. A sole trader whose profit is already below the £12,570 Personal Allowance gains nothing from claiming allowances that simply waste tax-free income, because the unused Personal Allowance cannot be carried forward but the pool balance can. In that situation, claiming a reduced allowance, or none, preserves relief for a more profitable future year. This is a genuine planning lever, not a loophole.
When you sell an asset, the sale proceeds are deducted from the relevant pool. If a disposal pushes a pool below zero, the excess is added back to your profits as a balancing charge, effectively clawing back relief you have already had. When a business ceases entirely, the closing pool balances are compared with disposal proceeds to produce a final balancing allowance or charge.
Capital allowances are where a lot of legitimate tax relief quietly slips through the cracks. The van, the laptop, the tools, the fit-out: record them properly through the year and the relief is yours. Reconstruct them in a January panic and some of it gets missed.
The practical risk with capital allowances is not the rules but the record-keeping. To claim correctly you need the purchase date, the cost, a description of the asset, and a note of any private-use proportion. HMRC is sceptical of capital figures reconstructed from memory at year end, particularly for assets with private use.
This is exactly where keeping digital records throughout the year pays off, and where Making Tax Digital for Income Tax, mandatory for sole traders with qualifying income over £50,000 from April 2026, pushes everyone in the right direction anyway. Capturing each asset purchase as it happens, with the receipt attached, means the capital allowances claim writes itself at year end rather than becoming a scramble. The sole trader calculator lets you model how those allowances feed into your overall liability.
TapTax connects to your bank, categorises expenses automatically, and submits quarterly updates to HMRC. Free plan, no card required.
