CAPITAL

ALLOWANCES
June 2025 – March 2026
BY SABI AKTHER 1
 What to focus on?

• Tax Depreciation
• The Concept
• Eligible Capital Expenditure

2
 What to focus on?
• Computational Principles
• Chargeable Period
• Allowances
• Pooling & Exceptions to Pooling
• Main Pool (18% WDA)
• Special Rate Pool (6% WDA)
• Pro Forma 1 – Capital Allowances Computation (Ignoring Item-by-Item Basis)
• Disposal Value
• The Item-by-Item Basis
• Pro-Forma 2 - Capital Allowances Computation (Including Item-by-Item Basis)
• Balancing Adjustments
• Small Pool Balances
• Cessation of Trading
• Short Life Asset Election
• Structures & Building Allowance 3
• Other Matters
 What to focus on?

• Short and Long Periods of Account

• Periods Less Than 12 Months
• Long Periods – More Than 12 Months (Income Tax Only)
• Conclusion
• Syllabus Coverage
• Summary
• Technical Articles

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Objective: To describe detailed Tax Depreciation
rules for computing capital • The Concept
allowances on plant and
machinery, including cars.
Computational Principles
• Chargeable Period
• Types of Allowance
• Pooling & Exceptions to Pooling
• 18% (Main) Pool
• 6% (Special Rate) Pool
• Pro Forma 1
• Disposal Values
• Item-by-Item Basis
• Pro Forma 2
• Balancing Adjustments
• Small Pool Balances
• Cessation of Trading
• Short Life Asset Election
• Structures & Building Allowance
• Other Matters

Short & Long Periods of Account

• Periods ≤ 12 months 5
• Periods > 12 months
 Tax Depreciation
1.1 The Concept

In place of "accounting depreciation" for plant and machinery, which is not an allowable
expense for tax purposes, HMRC allows a "tax depreciation", called capital allowances,
to give businesses tax relief for their capital expenditure on qualifying assets. Capital
allowances are given as an allowable deduction in calculating the business’s tax
adjusted trading profit. Remember that under the cash basis for unincorporated
businesses, cars used for business purposes are the only asset on which capital
allowances may be claimed (see Lecture 6).

Capital allowances are awarded in respect of eligible capital expenditure on new or

second-hand plant and machinery and structures and buildings. 6
 Tax Depreciation

1.1 The Concept

Definition

Capital allowances provide tax relief for businesses for capital expenditure on
qualifying assets, in place of accounting depreciation which is not allowable for tax
purposes.

Plant and machinery – apparatus, fixed or movable, permanently employed in a trade

(i.e. for more than a year) that performs a function as opposed to being part of the
setting (i.e. the building or structure) in which the activity is carried out.
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 Tax Depreciation

1.2 Eligible Capital Expenditure

Machinery of any type will qualify as plant and machinery; this includes computer
software, films, tapes and disks.

Statute has now established the following expenditures on "buildings" and "structures"
to be plant and machinery for tax purposes:

• Portable buildings used in the trade, cold stores and caravans used for holiday
lettings;

• Dry docks, floodlight towers, pipelines, temporary storage silos, railway and tramway
tracks.
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 Tax Depreciation
1.2 Eligible Capital Expenditure

Statute has also confirmed the following expenditure on fixtures included in buildings to
be plant and machinery:
• Thermal insulation added to any commercial building;
• Expenditure on commercial buildings to meet fire safety standards (e.g. fire escapes,
sprinkler and alarm systems; fire-fighting equipment);
• Cold water, gas and electrical systems;
• Space or water heating systems;
• Powered ventilation and air cooling/purification systems;
• Manufacturing or processing equipment; storage and display equipment; shop
counters and check-outs;
• Kitchen equipment; sanitary ware; furniture and furnishings;
9
• Specialised sound insulation;
 Tax Depreciation
1.2 Eligible Capital Expenditure

Statute has also confirmed the following expenditure on fixtures included in buildings to
be plant and machinery:
• Refrigeration equipment;
• Safes and bank strong-rooms;
• Moveable partitioning;
• Telecommunication surveillance and computer equipment;
• Decorative assets in hotels, restaurants, etc;
• Advertising hoardings and signs;
• Lifts, hoists, escalators, moving walkways; and
• Any other expenditures on fixtures that are reasonably classified as fixtures and not 10
part of the building itself.
 Tax Depreciation
1.2 Eligible Capital Expenditure

The following expenditure counts as part of the cost of a building as opposed to plant
and machinery included in that building, and as such is not eligible for plant and
machinery capital allowances:

• Site clearance and demolition;

• Excavation of foundations;
• Walls, floors, ceilings, doors, gates, shutters, windows, stairs, shafts for lifts;
• Sewerage systems;
• Access roads and car parks;
• Professional fees and other incidental costs associated with building construction;
11
• False ceilings (per case law).
 Computational Principles

2.1 Chargeable Period

Capital allowances are given for, and treated as, a trading expense of the period of
account for income tax purposes. (Capital allowances for corporation tax purposes is
covered in Lecture 17).

The adjusted profit after capital allowances is used to calculate the trading income
assessments.

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 Computational Principles

2.2 Allowances

2.2.1 Types of Allowances

Three types of allowance are available for plant and machinery:

• a writing down allowance;

• a first year allowance; and

• an annual investment allowance.

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 Computational Principles

2.2 Allowances

2.2.2 Writing Down Allowance (WDA)

WDA is an annual allowance calculated on a reducing balance basis at 18%

(generally) and 6% (for special rate assets and cars with CO2 emissions over 50
grams per kilometre) by reference to the written-down value (WDV) of assets held at
the end of the chargeable period.

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 Computational Principles

2.2 Allowances

2.2.3 First Year Allowance (FYA)

FYA is a 100% deduction which applies only to new and unused (not second-hand)
cars with zero CO2 emissions. The FYA is given in the chargeable period of purchase.

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 Computational Principles
2.2 Allowances

2.2.4 Annual Investment Allowance (AIA)

The AIA is available to all businesses, and gives 100% relief for the first £1,000,000 of
any qualifying plant and machinery expenditure (except cars) incurred in a chargeable
period.

The AIA can be used in the most beneficial way (i.e. against expenditures qualifying
for 6% WDA before that qualifying for 18% WDA).

Any expenditure in excess of the £1,000,000 limit qualifies for writing down
allowances (WDA) as normal. Expenditure not relieved by AIA is entitled to a 6%
WDA, if the expenditure is a special rate asset, or otherwise to an 18% WDA in the
16
same chargeable period.
 Computational Principles

2.2 Allowances

2.2.4 Annual Investment Allowance (AIA)

The AIA does not have to be claimed, however if AIA is not fully utilised in a
chargeable period, the unused amount cannot be applied in an earlier or later
accounting period.

The AIA is pro-rated for a long or short period of account (see s.3.1).

The AIA is not available in the period of account in which a trade ceases, as no
allowances are available in the final period.
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 Computational Principles
2.2 Allowances

2.2.5 Allowances For Cars

Cars have special rules for capital allowances purposes, with the rate of allowance
dependent on the level of CO2 emissions. Cars fall into one of three categories as
follows:

• 100% FYA - Electric cars with zero CO2 emissions

• 18% WDA - Low CO2 emissions of 50 grams/km or less
• 6% WDA - CO2 emissions over 50 grams/km

Exam advice

Rates of FYA, WDA (including the specific rates for cars with different CO2 emission
levels) and the AIA are given on the tax rates and allowances provided in the exam.
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 Computational Principles
2.3 Pooling and Exceptions to Pooling

For computational purposes, expenditure on plant and machinery attracting capital

allowances is dealt with in pools, where individual items lose their separate identity
and WDA is calculated on the WDV of the pool, except for some assets which must be
calculated on an item-by-item basis (such as assets with private use and short life
assets where an election to de-pool is made).

When a qualifying asset is acquired, the purchase price is added to the relevant pool
increasing the value of that pool. When a qualifying asset is disposed of, the pool
value is decreased by the lower of the sale proceeds and the original cost of the asset.

Most items of plant and machinery become part of the "main pool", or the "special rate
19
pool".
 Computational Principles
2.4 Main Pool (18% WDA)

This pool (also sometimes known as the general pool) includes expenditures on all
qualifying plant and machinery (including low CO2 emission cars).

Certain assets cannot be included in the main pool:

• cars with CO2 emissions over 50 grams/km;
• assets with private use by the owner of these business (these must be dealt with on
an item-by-item basis (see s2.8));
• short life assets (where an election to de-pool has been made (see s2.13)); or
• assets that form part of the special rate pool (see s2.5).

New cars with zero CO2 emissions can be included in the main pool if the FYA is not
claimed. Second hand cars with zero CO2 emissions can also be included in the main
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pool.
 Computational Principles

2.5 Special Rate Pool (6% WDA)

This pool only includes expenditures on:

• long life assets;

• thermal insulation of buildings;

• integral features of buildings; and

• cars with CO2 emissions over 50 grams/km.

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 Computational Principles
2.5 Special Rate Pool (6% WDA)

Long life assets are items of plant and machinery, with certain exclusions, which, when
new, have an expected life to the business of at least 25 years, provided the
expenditure is more than £100,000 for the 12-month period. The £100,000 limit is pro-
rated for a long or short period of account, and if expenditure is less than this limit, it
will be added to the main pool, or the special rate pool, depending on the type of
expenditure. The following are excluded from ever being long life assets:

• cars;

• plant and machinery in dwelling houses, retail shops, showrooms, hotels or offices.

Thermal insulation expenditure is appropriate expenditure on all commercial buildings,

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except those let for residential purposes by a property letting business.
 Computational Principles
2.5 Special Rate Pool (6% WDA)

Integral features are specific plant and machinery expenditures incurred when
constructing or altering all non-residential commercial buildings. The list includes:

• electrical (including lighting) systems;

• cold water systems;

• space or water heating systems;

• powered systems of ventilation, air cooling or air purification, and any floor or ceiling
comprised in such systems;

• lifts, escalators and moving walkways;

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• external solar shading.
2.6 Pro Forma 1 – Capital Allowances Computation (Ignoring Item-by-Item Basis)

Special rate pool Main pool Allowances

£ £ £ £
X X
WDV b/f
Additions
Special rate pool:
Assets qualifying for the AIA X
Less: AIA (X) X
X X
Main pool:
Assets qualifying for the AIA X
Less: AIA (unless already used) (X) X
X X
Cars with CO₂ > 50g/km (no AIA) X
Cars with CO₂ ≤ 50g/km (no AIA) X
X X
Disposals (see 2.7) (X) (X)
X X
WDA – 6% (X) X
WDA – 18% (X) X
X X
Additions (with 100% FYA):
New zero emission cars X
Less: 100% FYA (X) X
0
WDV c/f X X 24
Allowances X
 Computational Principles
2.7 Disposal Value

Disposals are eliminated from the computation at the lower of:

(i) proceeds value;

(ii) original cost.

Proceeds value normally equals actual sale proceeds, but may also be:

(i) the part exchange value (see later);

(ii) insurance compensation received;

(iii) scrap value; or

(iv) open market value where the disposal is either to a connected person (e.g. a
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close relative) or the asset is taken over personally by the proprietor.
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 Computational Principles

2.8 The Item-by-Item Basis

The item-by-item basis is used where the capital allowances have to be restricted or
otherwise specially calculated, so each item has its own separate column in the capital
allowances computation.

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 Computational Principles
2.8 The Item-by-Item Basis

The basis applies in two circumstances:

(1) Assets (most commonly cars) purchased at any time which are subject to private
use by the proprietor of an unincorporated business.

In this case, the WDA claimed is restricted to the agreed business use proportion.

This restriction of the WDA never applies to cars used by employees of a business
because the employee is assessed on the private use benefit and it is fair to allow the
employer (i.e. the business) to claim the full allowance.

If the privately used car is a new zero CO2 emission electric car, the 100% FYA
claimed will be restricted to the business use proportion. 30
 Computational Principles
2.8 The Item-by-Item Basis

The basis applies in two circumstances:

(2) Assets for which an election for "short life asset" (SLA) treatment has been made. A
short life asset is an asset that has an expected life to the business of less than eight
years.

This election may be beneficial in respect of an asset that has an expected life to the
business of less than eight years (see s.2.13). The election cannot be made in respect
of cars or assets with private use. If a short life asset election is made (in writing to
HMRC), a separate column will be required for each short life asset in the capital
allowances computation. 31
2.9 Pro Forma 2 – Capital Allowances Computation (Including Item-by-Item Basis)
Special Main Short life Car with Allowances
rate pool pool asset private use*
£ £ £ £ £ £
WDV b/f X X
Additions:
Special rate pool: (less AIA) X X
Main pool: (less AIA) X X
SLA (less AIA) X X
Private use car X
Cars with CO₂ ≤ 50g/km X
X X
Disposals (X) (X)
X X
WDA at 6% (X) X
WDA at 18% (X) (X) X
WDA at 6%/18% (X)** X***

Additions
(with 100% FYAs)
New zero emission cars X
Less: 100% FYA (X) X
0

WDV c/f X X X X
Total allowances X

Notes: * Car for which there is private use by proprietor of unincorporated business
** This is the full WDA (6% or 18%) disregarding the private use restriction 32
*** This is the actual WDA claimed (i.e. full WDA x business use proportion)
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 Computational Principles

2.10 Balancing Adjustments

When an asset is eventually sold, after a period of use in the business, a profit or a
loss arises, based on the cost of the asset less the tax relief already obtained (the
“written down value” (WDV)), and the disposal proceeds. This results in:

• a balancing charge (a negative allowance = additional profit of the period of

disposal); or

• a balancing allowance (an additional allowance in the period of disposal).

35
 Computational Principles
2.10 Balancing Adjustments

A balancing charge:

• arises when disposal proceeds exceed tax WDV;

• can occur on items that have been pooled and on those treated on an item-by-item
basis at any time.

A balancing allowance:
• arises when tax WDV exceeds disposal proceeds;
• can occur:

(i) on an item-by-item assets at any time;

(ii) on pools, when all the assets held in the pool are disposed of on permanent
36
cessation of the trade (see below).
 Computational Principles

2.10 Balancing Adjustments

Where an asset is subject to private use by the proprietor, any balancing charge
suffered or balancing allowance claimed is restricted to the agreed business use
proportion.

Balancing charges/allowances are dealt with after disposals and before WDA in the
computation. If there is an overall balancing charge for the period, it is added to the tax
adjusted trading profit.

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 Computational Principles

2.11 Small Pool Balances

When the tax WDV in a main rate or special rate pool is £1,000 or less, the taxpayer
can elect to write off the remaining balance (claiming it as a writing down allowance)
instead of continuing to make annual claims for very small amounts of WDA.

38
 Computational Principles

2.12 Cessation of Trading

In most circumstances involving the permanent cessation of a trade, no AIA, WDA or

FYA can be claimed in the final chargeable period. Instead, a balancing charge or
balancing allowance will arise.

39
 Computational Principles
2.12 Cessation of Trading

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 Computational Principles
2.12 Cessation of Trading

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 Computational Principles
2.13 Short Life Asset Election

An election can be made to treat an item of plant and machinery which would normally
be included in the main pool as a short life asset, provided the asset is not a car and is
not an asset subject to private use by the proprietor.

The election should be made where the taxpayer expects to sell the asset for less than
its WDV – hence accelerating allowances via a balancing allowance. However, it
should not be made if a balancing charge is anticipated on disposal (see Example 1).

The election must be made for income tax purposes, by 31 January following the first
anniversary of the end of the tax year in which the period of account of purchase
ended (e.g. 31 January 2027 for 2024-25 allowances). 44
 Computational Principles
2.13 Short Life Asset Election

If the SLA has not been sold (or scrapped) by the end of the period of account falling
not more than eight years after the end of the period in which the capital expenditure
was incurred, the WDV is transferred into the main pool for the purpose of calculating
further WDAs.

Assets qualifying as SLA attract the AIA. However, if the election is made to exclude
SLA expenditure from the other pools and the AIA is claimed, the resultant nil WDV will
inevitably mean that a balancing charge arises on disposal. Consequently, if the AIA is
available because it cannot be used more tax effectively against non-SLA
expenditures, it could be more beneficial not to make the SLA election and leave the
asset in the main pool. 45
 Computational Principles

2.13 Short Life Asset Election

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 Computational Principles
2.13 Short Life Asset Election

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 Computational Principles

2.14 Structures and Buildings Allowance

Structures and buildings allowance (SBA) was introduced in 2018. It is relevant when
a business incurs qualifying expenditure on nonresidential structures and buildings on
or after 29 October 2018. Relief is given as an annual straight-line allowance of 3%,
over a 3313 ​year period (33 years and four months).

Qualifying expenditure includes:

• Buildings, including offices, retail and wholesale premises, factories and

warehouses;

• Structures, including walls, bridges and tunnels.

56
 Computational Principles
2.14 Structures and Buildings Allowance

The value of land is not included in qualifying expenditure, nor is any part of the
building that is used as a dwelling house.

Expenditure which qualifies as plant and machinery cannot qualify for the SBA.
Similarly, expenditure which qualifies for the SBA cannot also qualify for the plant and
machinery annual investment allowance.

Where an unused building is purchased from a builder or developer, then the

qualifying expenditure will be the price paid less the value of the land.

The building or structure must be used for a qualifying activity such as a trade or
property letting. 57
 Computational Principles

2.14 Structures and Buildings Allowance

The SBA can only be claimed from the time when the building, or structure, is brought
into use. As such, the SBA will be time apportioned for the period when it is first
brought into use, unlike plant and machinery allowances which are always given in full
in the period of purchase.

A separate SBA is given for each building, or structure, that qualifies for relief.

Relief is also given for the cost of subsequent improvements, or where a building is
renovated or converted.
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 Computational Principles
2.14 Structures and Buildings Allowance

59
Computational Principles

60
 Computational Principles

2.14 Structures and Buildings Allowance

Unlike plant and machinery, there is no balancing charge or balancing allowance when
a building, or structure, that has qualified for SBA is sold. Instead, the purchaser can
continue to claim the 3% annual allowance for the remainder of the 331/3 year period,
based on the original cost. However, on disposal, the allowances that have been
claimed are effectively clawed back by adding them to the sales proceeds in order to
determine the chargeable gain or allowable loss arising.

61
 Computational Principles

2.14 Structures and Buildings Allowance

Exam advice

Questions in the exam will only be set where construction is on or after 6 April 2020.
For any question involving the purchase of a building (as opposed to a new
construction), you should assume that SBA is not available, unless the question
specifically states otherwise.

If the cash basis is being used, SBA will not be available.

62
Computational Principles

63
 Computational Principles

2.15 Other Matters

2.15.1 Pre-trading Capital Expenditures

Capital expenditure qualifying for plant and machinery allowances that were incurred as
pre-trading expenditure is deemed to have been incurred on the first day of trading for
capital allowance purposes.

2.15.2 Assets Acquired in Part Exchange

If when acquiring a new asset, an old asset is surrendered in part exchange, this is
treated as a separate disposal and acquisition. The part exchange allowance is both
the proceeds of sale of the old asset and part of the cost of the new asset.
64
 Computational Principles
2.15 Other Matters

2.15.3 Assets Acquired by Hire Purchase and Leased Assets

Assets acquired by hire purchase contract are treated as if they were purchased
outright for capital allowances purposes, therefore capital allowances are claimed on
the full cash price of the asset when it is brought into use. Although strictly speaking
the asset is hired during the contract, since the purchaser does not become the legal
owner of the asset until the final payment, for capital allowances it is treated as if it is
owned throughout the contract.

The hire purchase interest is treated as a trading expense and is deductible in

computing tax adjusted trading profits in the period it accrues. 65
 Computational Principles

2.15 Other Matters

2.15.3 Assets Acquired by Hire Purchase and Leased Assets

Leased assets are never owned by the lessee, ownership remains with the lessor. As
such, no capital allowances are available on the leased asset. The lease payments
are deductible in computing tax adjusted trading profits in the period they accrue
(except for the 15% add back on leased cars with CO2 emissions of more than
50g/km).

66
 Computational Principles
2.15 Other Matters

2.15.4 VAT

If required, the VAT exclusive amounts of costs and sales proceeds should be used
except for the purchase of new cars.

For new cars, the VAT inclusive amount should be used (because input VAT is not
recoverable).

Exam advice

The interaction of VAT with capital allowance is examinable, but it should be ignored
unless the examiner specifically requires the issue to be addressed in a question. 67
 Computational Principles

2.15 Other Matters

2.15.5 Partial Claims

A taxpayer (individual or company) will normally claim the maximum capital allowances
available, but may claim any lesser amount if it is more tax effective to do so.

Reduced claims can be of the AIA, WDA and FYA.

One reason why individuals may not claim their full capital allowance entitlement is to
avoid wasting their personal allowance (PA), which unlike capital allowances, cannot be
carried forward if unused.
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 Computational Principles
2.15 Other Matters

2.15.5 Partial Claims

69
 Short & Long Periods of Account
3.1 Periods Less Than 12 Months

If the period of account is less than 12 months, the WDA, the AIA (but not FYA), and the
small pools allowance are pro-rated downwards on a time basis.

For example, if the balance on the main pool was £5,000 and the accounting period was the
six-month period ended 31 December 2024, the WDA would be restricted to £450 (£5,000 ×
18% × 6/12).

The AIA is also pro-rated for a short period of account. The £1,000,000 limit is
proportionately reduced where a period of account is shorter than 12 months. For example,
for the six-month period ended 31 December 2024, the AIA limit would be £500,000
(£1,000,000 × 6/12).

This does not apply for FYA.

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These rules apply for both income tax and corporation tax purposes.
71
72
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 Short & Long Periods of Account
3.2 Long Periods – More Than 12 Months (Income Tax Only)

The WDA, the AIA (but not FYA), and the small pools allowance are pro-rated upwards on a
time basis if the period of account is more than 12 months.

The AIA is pro-rated for a long period of account, with the £1,000,000 limit proportionately
increased where a period of account is longer than 12 months. For example, for the 18-
month period ended 31 December 2024, the AIA limit would be £1,500,000 (£1,000,000 ×
18/12).

The small pools allowance of £1,000 is also increased proportionately, such that for the 18-
month period ended 31 December 2024, the small pools allowance would be £1,500
(£1,000 × 18/12).

This does not apply for FYA.

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These rules only apply for income tax purposes.
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 Conclusion
Syllabus Coverage
B. Income Tax and NIC Liabilities
3. Income from self-employment

e. Capital allowances
i. Define plant and machinery for capital allowances purposes.
ii. Compute writing down allowances, first-year allowances and the annual
investment allowance.
iii. Compute capital allowances for cars.
iv. Compute balancing allowances and balancing charges.
v. Compute structures and buildings allowances.
vi. Recognise the treatment of short life assets.
vii. Recognise the treatment of assets included in the special rate pool. 78
 Conclusion
Summary

• Capital allowances replace accounting depreciation in the determination of taxable

profits for unincorporated businesses and companies.

- Rates of first year and writing down allowances (for plant and machinery and
cars) and the limit for the annual investment allowance (AIA) are provided in the
examination.

- Unused AIA is "lost".

- 100% FYA applies only to new and unused zero emission electric cars.

• The special rate pool applies to long life assets, building insulation, integral building
features and cars with CO2 emissions exceeding 50 g/km. The main pool includes all
other items except those dealt with on an item-by-item basis (i.e. private use cars 79
and short life assets).
 Conclusion
Summary

• Assets are eliminated from the computation when they are disposed of at the lower of
proceeds and original cost.

• A balancing charge (or allowance) arises when disposal proceeds are more (or less)
than the tax WDV. This must be restricted to the agreed business proportion on
private use assets.

• A pool with a tax WDV balance of £1,000 or less can be written off.

• The short life asset election can generate a balancing allowance and is therefore
recommended for assets that depreciate more rapidly where disposal is anticipated
at less than WDV. 80
 Conclusion

Summary

• VAT exclusive amounts of costs and sales proceeds should be used except for new car
purchases (for which VAT is irrecoverable).

• The WDA, the AIA (but not FYA) and the small pools allowance are flexed downward
for short accounting periods and upwards (income tax only) for long accounting
periods.

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 Conclusion

Technical Articles

In addition to the Finance Act 2024 Article, there are several technical articles for
Taxation (UK). The following article is relevant to this chapter:

• Cars (Relevant to those sitting TX-UK in June, September, December 2025 or March
2026)

For more recent articles and other resources please visit the ACCA global website.

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