16 Dec 2025
How to use capital allowances to offset corporation tax
Capital allowances are a valuable form of tax relief that allow businesses to deduct the cost of qualifying capital expenditure from taxable profits, reducing corporation tax liabilities. This relief is particularly relevant for companies investing in assets such as plant and machinery or structures and buildings.
Under the Capital Allowances Act 2001, capital allowances replace depreciation for tax purposes, enabling businesses to claim deductions on qualifying assets—sometimes up to 100% of the expenditure in the year incurred. Understanding how to identify qualifying costs and claim the right allowances can significantly improve your tax position.
Identifying qualifying expenditure
The first step is to ensure all qualifying expenditure is captured. While obvious items include computers, furniture, and vehicles, building or refurbishment projects often hide opportunities for relief.
Examples of qualifying costs:
- Heating, lighting, and electrical systems
- Alarm systems and security installations
- Fitted kitchens and bathroom sanitaryware
- Transport and installation costs
- Certain survey and preliminary expenses
What capital allowances can be claimed?
Choosing the right allowance and claiming it efficiently can be complex. Here are the main options:
| Annual investment allowance (AIA) | 100% relief for up to £1m of qualifying plant and machinery expenditure up to £1m. It is often best to use this allowance first. There are special rules on where the £1m allowance needs to be share |
| Full expensing | This is an unlimited 100% first year allowance on new and unused qualifying ‘main pool’ expenditure such as furniture, alarm systems and data cabling |
| 50% first year allowances | This is an unlimited 50% allowance which can be used against ‘special rate pool’ expenditure. This can include heating systems, lighting systems, electrical and water systems, lifts, etc (known as integral features) as well as solar panels |
| Writing down allowances | For any amounts brought forward or not claimed above, writing down allowances at 18% or 6% can be claimed |
| Structures and buildings allowance (SBA) | For construction or refurbishment projects, the SBA allows a 3% deduction of the building costs per annum. |
| Land remediation relief | A 150% deduction for cleaning up land in a contaminated state. This can include matters such as asbestos, Japanese knotweed or removing chemicals from industrial activity |
Special capital allowances can also be claimed for R&D capital expenditure, or for capital expenditure incurred in freeports and investment zones.
Other factors to consider
It is often best to claim allowances at the highest level and as quickly as possible to save corporation tax at the earliest opportunity or create a tax refund. In many cases this can lead to a trading or rental business loss.
If allowances are not claimed in the year of expense then only writing down allowances can be claimed in subsequent years which can take several years for most of the relief to flow through.
There are some situations where claiming capital allowances as fast as possible may not always be the best option and modelling will be required. For example, where companies or a group are impacted by the corporate interest restriction (where net interest and financing costs exceed £2m per annum). Care should also be taken where losses brought forward in a company or group could exceed £5m whereby profits beyond this can only be relieved by 50% of brought forward losses.
When incurring significant capital expenditure, it is important to ensure early advice is obtained to capture the qualifying expenditure and decide on the optimum way to claim.
Want to know how to use capital allowances to offset corporation tax?
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