Definition
Capital allowance is the UK tax mechanism that replaces accounting depreciation for fixed-asset tax relief. The system provides statutory deductions (Annual Investment Allowance, full expensing, writing-down allowances) that let businesses deduct the cost of qualifying plant and machinery from their taxable profit at specific prescribed rates set by HMRC. Capital allowances are the standard tax-relief route for any UK business that buys vehicles, equipment, IT hardware, fixtures, or other tangible fixed assets.
What capital allowances mean in practice
For a UK bookkeeper, capital allowances are the tax-side mirror of depreciation. On the accounting side, the business depreciates its fixed assets over their useful lives per FRS 102 Section 17. On the tax side, HMRC disregards that accounting depreciation entirely and substitutes capital allowances calculated under the Capital Allowances Act 2001. The two figures are almost never the same.
The mechanics in the corporation tax computation: start with accounting profit. Add back accounting depreciation (a non-deductible item). Deduct capital allowances (computed separately). Apply the corporation tax rate to the adjusted figure. The result is the corporation tax due. The capital allowances calculation is its own working paper, maintained by the bookkeeper or accountant alongside the year-end accounts.
A practical example: a UK consultancy buys a 2,400 MacBook Pro on 1 April 2026 with a 3-year useful life. Accounting depreciation: 800 per year. Capital allowances: under AIA, the full 2,400 is deductible in 2026-27. So in year 1, the corporation tax computation adds back 800 of depreciation and deducts 2,400 of AIA, a net effect of -1,600 on taxable profit (a tax saving of 400 at 25%). In years 2 and 3, the computation adds back 800 of depreciation but has no further capital allowance to deduct on this asset, so taxable profit is 800 higher than accounting profit each year (a tax cost of 200 at 25%). Over three years the timing effects net out; the AIA simply accelerated the relief.
How capital allowances work by country
United Kingdom
Three main routes for 2026-27:
- Annual Investment Allowance of up to 1 million per year (100% first-year deduction on qualifying plant and machinery, available to all businesses)
- Full expensing (companies only, no cap, applies to new main-rate plant and machinery)
- Writing-down allowances of 18% main pool or 6% special rate pool on the reducing balance, applied to anything that has not been fully expensed via AIA or full expensing
Cars have their own regime based on CO2 emissions: electric cars at 100% FYA until April 2026; up to 50g/km in main pool at 18%; above 50g/km in special rate pool at 6%. Buildings have a separate Structures and Buildings Allowance at 3% per year straight-line.
Australia
Australia uses “tax depreciation” under Division 40 of the Income Tax Assessment Act 1997 rather than “capital allowance” as the term. The mechanic is equivalent: prescribed effective lives from Taxation Ruling TR 2024/4. The small business instant asset write-off (up to AUD 20,000 per asset, extended through 30 June 2026) is the closest equivalent to the UK AIA for SMBs.
Canada
Canada uses “Capital Cost Allowance” (CCA), which is the closest international equivalent to UK capital allowances. CCA classes prescribe rates by asset type: Class 50 (computer equipment, 55% declining balance), Class 8 (most office furniture and equipment, 20%), Class 10.1 (passenger vehicles above the CRA’s prescribed cost ceiling). The half-year rule limits first-year claims. The Accelerated Investment Incentive accelerates first-year claims for purchases between 2018 and 2027.
New Zealand
New Zealand uses “tax depreciation” at IRD-prescribed rates by asset class. The term “capital allowance” is uncommon in NZ practice. Each class has both a diminishing-value rate and a straight-line rate; the business chooses at acquisition.
Singapore
Singapore uses “capital allowance” as the formal term in the Income Tax Act. Sections 19, 19A, and 19A(2) provide the framework. Section 19 spreads over working life; Section 19A allows three-year write-off; Section 19A(2) allows two-year write-off in qualifying years. The Singapore terminology is closer to the UK than to Australia or New Zealand.
Related terms
Capital allowance is the UK tax-side counterpart to accounting depreciation:
- Depreciation is the accounting-side equivalent.
- Capital expenditure is the cash outlay that triggers a capital allowance claim.
- Fixed assets are the balance-sheet items that capital allowances apply to.
- Operating expenses are deducted in full in the period (no capital-allowance equivalent needed).
- Net profit reconciles to taxable profit via add-back of depreciation and deduction of capital allowances.
- Mileage allowance is the UK alternative for personal vehicle business use, in place of capital allowances on a company car.
See also
For the UK VAT lifecycle and corporation tax context, see the UK VAT and MTD guide.
FAQ
See the answered questions above for why HMRC disallows accounting depreciation, AIA vs full expensing, and capital allowances on cars.