When you buy something built to last for the business, you cannot expense it outright — capital allowances are how HMRC gives you that relief instead.
Buy a £40 stapler and it is an everyday expense. Buy a £4,000 machine and HMRC treats it differently — it is capital, expected to earn its keep for years, so you cannot simply deduct it from this year's profit. Capital allowances are the system's answer to that distinction, and for most sole traders they are far more generous than the word "allowance" suggests.
When you prepare accounts, you spread the cost of a long-lived asset over its useful life as depreciation. HMRC does not accept depreciation as a tax deduction because businesses could otherwise set their own rates and manipulate profit. Instead, the tax system substitutes its own standardised relief: capital allowances. The asset still reduces your tax bill — just on HMRC's timetable rather than your accountant's.
The assets that qualify are broadly described as plant and machinery: tools, computers, office furniture, equipment, vans, and integral building features like wiring and air conditioning. The building shell, the land it sits on, and anything you lease rather than own do not qualify.
In 2025/26, Lewis, a self-employed electrician, buys a £22,000 van and a £18,000 used car (CO2 emissions of 130g/km, used 90% for business).
The van qualifies for the Annual Investment Allowance, so the full £22,000 is deducted from his profit this year.
The car cannot use the AIA. Because its emissions exceed 50g/km it goes into the special rate pool at 6%. The first year's writing-down allowance is £18,000 x 6% = £1,080, but only the 90% business-use share is allowable: £1,080 x 90% = £972. The remaining balance carries forward and is written down at 6% again next year, and so on.
So in year one Lewis claims £22,000 + £972 = £22,972 in capital allowances against his profit. Feed these into the sole trader calculator to see the effect on his bill.
The dividing line trips people up constantly. A consumable or short-life cost — printer paper, fuel, a software subscription — is an everyday allowable expense, deducted in full in the year you incur it. A durable asset expected to last more than around two years is capital, and goes through capital allowances instead. The practical effect is often the same in year one (thanks to the AIA giving 100% relief), but the route, the records and the rules differ.
Capital allowances are simply the tax system's version of depreciation — a controlled way of giving you relief on the things your business buys to last.
Cars are the perennial exception. They never qualify for the AIA, and the writing-down rate depends on emissions: new zero-emission cars get a 100% first-year allowance, cars at 50g/km or below sit in the main pool at 18%, and anything above goes to the 6% special rate pool. Sole traders using the cash basis cannot generally claim capital allowances except on cars. From April 2026, Making Tax Digital reporting applies to affected sole traders, but the underlying capital allowance rules are unchanged.
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