Claiming Capital Allowances in 2026: How Businesses Can Reduce Corporation Tax
Capital allowances remain one of the most effective ways for businesses to reduce their corporation tax bill. If your company invests in equipment, machinery, or certain building systems, you may be able to deduct some or all of the cost from your taxable profits.
However, tax rules have changed in recent years. The 130% super-deduction ended in March 2023, and it has been replaced by new reliefs such as full expensing and the Annual Investment Allowance (AIA).
Understanding which assets qualify can significantly reduce your tax liability.
What Are Capital Allowances?
Capital allowances allow businesses to claim tax relief on capital expenditure, such as:
- Machinery and manufacturing equipment
- Computers and IT systems
- Tools and vehicles used in the business
- Certain building fixtures such as electrical systems or heating
Instead of deducting these costs as normal expenses, they are claimed through capital allowances, which reduce taxable profits.
Full Expensing (100% First-Year Relief)
For companies subject to corporation tax, full expensing allows businesses to claim 100% tax relief on qualifying new plant and machinery in the year of purchase.
This means the entire cost can be deducted from taxable profits immediately, rather than spread over several years.
Key conditions include:
- The asset must be new and unused
- It must be purchased by a limited company
- The asset must be used for business purposes
Full expensing has effectively replaced the earlier super-deduction scheme.
Annual Investment Allowance (AIA)
The Annual Investment Allowance allows businesses to deduct up to £1 million per year on qualifying plant and machinery.
Unlike full expensing, the AIA can be claimed by:
- Limited companies
- Sole traders
- Partnerships
It also applies to new or second-hand equipment, making it useful for smaller businesses investing in assets.
First-Year Allowances for Special Rate Assets
Certain assets qualify for a 50% first-year allowance rather than full expensing.
These typically include special rate assets, such as:
- Heating and ventilation systems
- Electrical systems
- Water systems
- Lifts and escalators
- Long-life assets
These are often fixtures installed within buildings.
Do Buildings Qualify for Capital Allowances?
Buildings themselves generally do not qualify for plant and machinery allowances, but there are important exceptions.
In some cases, specialised structures may be treated as plant rather than buildings for tax purposes.
Examples from tax case law include:
- Mechanised grain silos
- Potato storage facilities
These were considered plant because they functioned as specialised systems designed to control temperature and humidity for agricultural production, rather than simply acting as buildings.
Each case depends on the function of the structure, so professional advice is often required.
Capital Allowances for Unincorporated Businesses
Sole traders and partnerships cannot claim full expensing, as it is limited to companies.
However, they can still benefit from:
- Annual Investment Allowance (AIA) – up to £1 million
- Writing Down Allowances for assets not qualifying for AIA
This means most plant and equipment purchases can still receive 100% tax relief in the year of purchase through the AIA.
Why Capital Allowances Matter More Now
With corporation tax rates now reaching up to 25% for companies with profits over £250,000, claiming all available allowances is more important than ever.
Businesses investing in equipment, technology or infrastructure should review their purchases carefully to ensure they claim the maximum relief available.
Planning Asset Purchases
Before making significant purchases, it is worth reviewing:
- Whether the asset qualifies for full expensing or AIA
- Whether it may be classified as plant rather than part of a building
- The timing of the purchase relative to the accounting year
Strategic planning can accelerate tax relief and improve cash flow.
Need Advice on Capital Allowances?
Determining whether equipment, building systems or specialist structures qualify for capital allowances can be complex.
At Merranti Accounting, we help businesses:
- Identify qualifying assets
- Maximise capital allowance claims
- Reduce corporation tax liabilities
- Ensure compliance with HMRC rules
If you are planning a major investment or equipment purchase, speak to us first to ensure you claim the maximum tax relief available.
