How to Claim Software Costs in the UK (2026 Guide)

Quick answer

Software subscriptions are deductible as you pay them. Software you own, whether a perpetual licence, a bespoke build, or a new website, is capital, and HMRC treats it as plant and machinery. That still usually means relief in full in year one: sole traders through the Annual Investment Allowance, companies through full expensing, and any business through the new 40% first-year allowance from January 2026 where the others do not apply. Overseas SaaS carries reverse-charge VAT.

Is software tax deductible in the UK?

Yes, but the route depends on what you bought. HMRC’s capital/revenue divide is about enduring benefit. A SaaS seat that disappears the month you stop paying has no enduring value, so it is revenue and goes straight through the profit and loss account. HMRC’s Business Income Manual uses the shop-window analogy for websites: building the window is capital, changing the display is revenue. Regular update costs for an existing site are deductible; the original build is not.

For capital software, the Capital Allowances Manual removes any doubt about classification: treat computer software as plant whether or not it would normally be regarded as plant, and a right to use software is plant too. So a perpetual licence for a design package, a custom-built job-management system, or a one-off website build all enter the capital allowances computation as main-rate plant and machinery.

Limited companies have one extra layer. Capital software is normally dealt with under the corporate intangible fixed assets regime, which follows the amortisation in the accounts. A company can elect under section 815 CTA 2009 to exclude the software from that regime and claim capital allowances instead. With full expensing available, the election is often the better outcome.

How much can you claim?

Revenue software: the full cost, apportioned if there is private use. Capital software: the full cost through one of three first-year routes.

Worked example: a small agency run as a sole trader pays £3,600 a year across Xero, a design suite, and a project tool, and commissions a £12,000 bespoke client portal. The £3,600 is deducted as a running cost. The £12,000 is plant, claimed in full under the AIA in the year the portal is brought into use, so the total deduction is £15,600. The same agency as a limited company would deduct the £3,600 as an expense and claim full expensing on the £12,000. If it later sells the portal code, full expensing triggers a balancing charge on the proceeds.

Any capital software not covered by a first-year route drops into the main pool at 14% a year, the rate that applies from 1 April 2026 for companies and 6 April 2026 for income tax. Pools of £1,000 or less can be written off under the small pools allowance.

VAT on software

UK-billed software carries 20% VAT, recoverable as input VAT at the business proportion. Overseas vendors are the common mistake: a US or EU invoice shows no UK VAT and must be coded for the reverse charge, with output and input VAT entered on the same return. Businesses that are not VAT registered have nothing to account for. Under Making Tax Digital the software itself must also meet a standard: VAT records have to be kept in functional compatible software with digital links between systems, and copy-and-paste does not count.

Record-keeping requirements

Keep the licence agreement or order confirmation, because it is the document that proves whether you bought a perpetual right (capital) or a term subscription (revenue). Keep renewal invoices for subscriptions and the development contract and acceptance sign-off for bespoke builds, since the date the software is brought into use fixes the year of the capital allowance claim. Self Assessment records last 5 years after the filing deadline, VAT records 6 years.

How to claim, step by step

1. Classify each software cost on purchase: term subscription or support contract is revenue; perpetual licence, bespoke build, or new website is capital.
2. Post revenue software to a software or IT expense account, apportioning any private use.
3. For capital software, add the cost to the fixed asset register with the in-use date, then claim the AIA (unincorporated) or full expensing (company), or the 40% first-year allowance if those are unavailable.
4. Companies: decide whether a section 815 election out of the intangibles regime gives faster relief, and make it within the time limit.
5. Code overseas SaaS invoices with the reverse-charge tax rate so the VAT return picks up both sides.
6. Review subscriptions annually and cancel idle seats; they remain deductible but they are still cash out of the door.

Common mistakes

• Capitalising a monthly SaaS subscription because it is “software”, or expensing a £10,000 bespoke build because the invoice said “development services”.
• Deducting the original website build as marketing. HMRC treats construction as capital; only ongoing updates are revenue.
• Companies amortising software slowly under the intangibles rules when a section 815 election and full expensing would have relieved it in full.
• Claiming the 40% first-year allowance on second-hand software or licences bought from another business.
• Coding overseas SaaS as zero-rated instead of applying the reverse charge.

Software that helps

• Dext pulls renewal invoices from forwarded emails and codes recurring vendors consistently month to month.
• ExpenseFlow reads software invoices with frontier vision AI, tells a subscription from a perpetual licence or build, explains the call under each line, lowers its confidence for review when the invoice does not say which, flags overseas bills that need reverse-charge or import treatment, and syncs the approved result to Xero or QuickBooks with the invoice attached.
• Xero itself handles repeating bills and a fixed asset register in one place, which keeps the AIA claim tidy.

FAQ

See the answered questions above for subscriptions, capital software, first-year relief, the company election, and overseas VAT.