Capital Allowances on Equipment: A Guide for Sole Traders
Introduction
When you buy equipment for your business, you cannot usually deduct the full cost as an expense in the year of purchase. Instead, you claim capital allowances which spread the tax relief over time, or in some cases, allow you to claim 100% in year one.
This guide explains how capital allowances work, the Annual Investment Allowance (AIA), writing down allowances, and which assets qualify. Understanding these rules helps you maximise your tax relief and plan purchases effectively.
What Are Capital Allowances?
Definition
Capital allowances are tax deductions for the cost of business assets. They replace depreciation (which is not allowable for tax) and let you claim relief on:
- Equipment and machinery
- Computers and IT equipment
- Office furniture
- Tools
- Vehicles
- Some fixtures in buildings
How they work
Instead of claiming the purchase price as an expense, you add the asset to a capital allowances pool and claim allowances each year until the cost is fully relieved.
Annual Investment Allowance (AIA)
What is the AIA?
The AIA lets you claim 100% tax relief on qualifying equipment purchases in the year you buy them, up to the annual limit.
Current limit (2025/26)
The AIA limit is £1,000,000 per year.
This is a permanent rate and applies to most plant and machinery.
What qualifies for AIA?
- Computers and laptops
- Office equipment (printers, copiers)
- Furniture and fixtures
- Tools and machinery
- Vans and commercial vehicles
- Software (in some cases)
What does NOT qualify for AIA?
- Cars (use separate car capital allowances rules)
- Items given to you
- Items bought before you started the business
- Items not used for business purposes
Example calculation
You buy:
- Computer: £1,500
- Office furniture: £2,000
- Van: £25,000
- Total: £28,500
With AIA, you can claim the full £28,500 as a deduction in year one.
Writing Down Allowance (WDA)
When WDA applies
If you exceed the AIA limit, or for assets that do not qualify for AIA, you claim Writing Down Allowance instead.
How WDA works
You add assets to a pool and claim a percentage of the pool value each year:
| Pool type | Rate | What it covers |
|---|---|---|
| Main rate pool | 18% | Most equipment |
| Special rate pool | 6% | Long-life assets, integral features, high-emission cars |
Example
- Asset cost: £10,000
- WDA at 18%: £1,800 in year 1
- Remaining pool: £8,200
- WDA in year 2: £1,476 (18% of £8,200)
- And so on...
The pool reduces each year until it is fully written off or you sell the asset.
First Year Allowance (FYA)
100% FYA for certain assets
Some assets qualify for 100% first year allowance, meaning you can claim the full cost in year one regardless of the AIA limit:
Qualifying assets
- Electric vehicles (zero emissions)
- New and unused zero-emission goods vehicles
- Electric vehicle charging points (business use)
- Certain energy-efficient equipment
- Water-saving equipment
Electric vehicles
If you buy a fully electric car for business, you can claim 100% FYA on the full purchase price. This is a significant advantage over petrol or diesel cars.
Cars: Special Rules
Why cars are different
Cars have their own capital allowances rules and do not qualify for AIA.
Car allowance rates (2025/26)
| CO2 emissions | Allowance |
|---|---|
| 0g/km (electric) | 100% First Year Allowance |
| 1-50g/km | 18% Writing Down Allowance (main rate) |
| Over 50g/km | 6% Writing Down Allowance (special rate) |
Private use adjustment
If you use a car for both business and personal purposes, you reduce the allowance by your personal use percentage.
Example:
- Car cost: £30,000
- CO2: 120g/km (6% WDA)
- Year 1 allowance: £1,800
- Business use: 70%
- Claimable: £1,260
Small Pools Allowance
What it is
If your main rate or special rate pool balance is £1,000 or less, you can claim the full remaining balance instead of continuing with WDA.
Why it matters
This speeds up relief on small remaining balances rather than continuing to claim small percentages indefinitely.
Balancing Allowances and Charges
When you sell an asset
If you sell an asset still in your capital allowances pool, you need to adjust:
Balancing allowance: If the sale proceeds are less than the pool value, you can claim the difference as an allowance.
Balancing charge: If the sale proceeds exceed the pool value, the excess is added to your taxable profits.
Example
- Pool value: £3,000
- Sale proceeds: £1,500
- Balancing allowance: £1,500 (claimable)
Or:
- Pool value: £3,000
- Sale proceeds: £4,000
- Balancing charge: £1,000 (taxable)
Mixed Use Assets
Business and personal use
If equipment is used partly for personal purposes, you can only claim capital allowances on the business proportion.
How to calculate
- Determine the business use percentage
- Apply this to the capital allowance claim
Example:
- Laptop cost: £1,200
- Business use: 80%
- AIA claim: £1,200 x 80% = £960
Record Keeping Requirements
What to keep
- Purchase invoices showing date, cost, and description
- Evidence of payment
- Record of how you calculated business use percentage
- Details of any sales or disposals
Asset register
It is good practice to maintain an asset register showing:
- Description of each asset
- Date purchased
- Cost
- Capital allowances claimed each year
- Sale date and proceeds (if disposed)
How long to keep records
Keep all records for at least 5 years after the 31 January filing deadline for the relevant tax year.
Planning Your Purchases
Tax year timing
Capital allowances are claimed in the tax year you incur the expenditure. If you are near the end of your accounting period and expecting higher profits, bringing forward a purchase could increase your relief.
AIA planning
With a £1,000,000 limit, most sole traders will not exceed the AIA. But if you have a large purchase, ensure you claim it strategically.
Electric vehicles
The 100% FYA for electric vehicles makes them particularly tax-efficient. Consider this when planning vehicle purchases.
How QTax Helps
QTax supports you by:
- Identifying which purchases qualify for capital allowances
- Calculating AIA, WDA, and FYA claims
- Tracking your capital allowances pools
- Ensuring accurate claims on your Self Assessment
FAQs
Can I claim capital allowances on a laptop I use partly for personal use?
Yes, but only on the business proportion. If you use it 70% for business, you claim 70% of the cost.
What if I buy equipment before I register as self-employed?
You can claim capital allowances on assets you already own when you start the business, based on their market value at that date.
Is furniture covered by capital allowances?
Yes, office furniture qualifies as plant and machinery and is eligible for AIA.
What about software?
Some software qualifies for capital allowances. Off-the-shelf software typically qualifies; bespoke software may be treated differently.
Conclusion
Capital allowances are a powerful tool for reducing your tax bill when you invest in equipment. The Annual Investment Allowance gives most sole traders 100% relief in year one, while electric vehicles benefit from generous first year allowances.
For the 2025/26 tax year, plan your purchases carefully, keep detailed records, and ensure you claim all the relief you are entitled to.
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