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Unlock tax savings with capital allowances—your guide to smarter investments for innovative, R&D-driven businesses.
When you're investing in the future—developing cutting-edge products, improving processes, or experimenting with new technologies—every penny counts. You might be surprised that some of your major purchases can translate into tax savings. That’s precisely what capital allowances are designed for.
By investing in significant assets—like machinery, lab equipment, or certain building works—you have the opportunity to deduct some or all of that cost from your taxable profits. And, even better, they often fall under categories with accelerated relief, meaning you could claim the full cost in the year you make the purchase.
This results in a lower tax bill, allowing you to reinvest more into your business. It's like a government-approved incentive for making investments.
For companies already claiming R&D tax credits, capital allowances provide a separate yet complementary avenue for enhancing tax efficiency. If your business is engaged in research and development, grasping the mechanics of capital allowances can lead to significant financial benefits.
At its core, capital allowances are designed to help businesses account for the wear and tear of their assets. While you can't deduct accounting depreciation for taxes, capital allowances fill that role. These allowances cover tangible fixed assets like machinery, equipment, and certain fixtures in buildings, as well as vehicles and some expenses related to research and development.
Keep in mind that the rules, rates, and eligibility criteria can vary depending on the type of asset and when it was purchased—so understanding how each allowance works is key to making the most of them.
Capital allowances apply to all kinds of businesses, including limited companies, partnerships, sole traders, and limited liability partnerships (LLPs). You don’t have to be in manufacturing or heavy industry either; service-based businesses often purchase qualifying assets, especially things like IT infrastructure and office equipment.
It’s important to mention that industries with high capital investments usually see the biggest benefits, thanks to the size and frequency of their financial commitments. So what type of capital allowance can your business claim?
There are several different types of capital allowances. Which one you use depends on what you’re claiming for and how much you’re spending.
The AIA allows businesses to deduct the full cost of qualifying items (like machinery, tools, and equipment) up to a certain annual limit. Currently, this limit is set at £1 million—plenty of room for most small to medium-sized R&D companies.
Example: A biotech firm buys a new gene sequencer for £500,000. With AIA, it can deduct the full £500,000 from your profits in the same tax year, significantly reducing its Corporation Tax liability.
Perfect for: General plant and machinery investments.
Certain environmentally beneficial or energy-efficient equipment qualifies for 100% first-year allowances. This means you can deduct the entire cost right away instead of spreading it out over several years.
Example: A company installs a new solar panel system to power its lab. It can claim 100% of the cost in the first year if it qualifies under the government's energy-saving technology list.
Perfect for: Green upgrades and sustainable investments.
Introduced in April 2023, full expensing allows companies to deduct the entire cost of qualifying new, unused plant and machinery from its profits before tax in the year it’s incurred—no waiting, no spreading the cost.
Example: A robotics firm purchases £300,000 worth of automation equipment. Under full expensing, the full amount is deducted from their taxable profits for that year.
Perfect for: Fast-moving tech companies scaling up operations.
Not everything qualifies for AIA or full expensing. For assets that fall outside those allowances (or go beyond the annual cap), businesses can still claim through WDA by deducting a percentage each year instead of claiming the full amount at once.
Example: A specialist piece of R&D kit costs £200,000 but doesn’t qualify for AIA. The company would claim 18% (main pool) or 6% (special rate pool) annually until the full value is written off.
Perfect for: Long-life assets, fixtures, and niche purchases.
If you’re looking to build, buy, or lease a structure and your construction contracts were signed on or after October 29, 2018, you might be eligible for some tax relief. The SBA offers a great opportunity to claim tax relief on your costs for building or renovating commercial properties. You can enjoy a 3% annual claim over the next 33 years.
Example: A company builds a new R&D facility costing £3 million. Each year, it can deduct £90,000 from its taxable profits.
Perfect for: Companies building or improving their own labs or test centres.
RDA allows a 100% deduction for capital expenditures on R&D. It applies to labs, test rigs, and any capital asset used solely for R&D.
Example: An engineering team installs a £150,000 prototype testing rig. With RDA, the company can deduct the full cost in year one.
Perfect for: R&D-specific projects and infrastructure.
Applying these allowances strategically can significantly improve cash flow and reduce tax liabilities while continuing to invest in growth and development. So what can you claim capital allowances on?
Here's the good news—lots of items qualify as "plant and machinery". Common examples include:
Timely and accurate claims can be a boon for a company’s financial performance, especially in tight cash-flow conditions or periods of investment. Capital allowances also support long-term planning, giving finance teams a tool to align tax strategy with broader business objectives.
Generally, businesses should claim the relief in the accounting period in which the expenditure occurs. While failing to claim on time doesn’t lead to a permanent loss—since unclaimed allowances can be carried forward—immediate claims usually offer the best cash-flow benefits.
Claims are made through the Corporation Tax Return submitted to HMRC. This might sound simple in theory, but in practice, accurate claims depend on correctly classifying assets, determining the correct pool or rate of allowance, and maintaining proper records. Fixed asset registers need to be up-to-date and aligned with tax categories, not just accounting standards. This means cooperation between finance, tax, and sometimes operational departments is crucial.
It is also worth noting that HMRC expects claims to be substantiated. This means having proper documentation, invoices, descriptions of assets, and in some cases, technical reports. While there is no statutory requirement to submit all evidence with the tax return, being able to provide it on request is crucial, especially in the event of a compliance check. Businesses with robust internal processes and audit trails are, therefore, better placed to defend their claims and avoid unnecessary disputes or delays.
Overall, capital allowances are far more than just a box-ticking exercise. They represent a fundamental aspect of corporate tax strategy that can influence capital budgeting, investment decisions, and financial planning. Businesses that treat them proactively rather than reactively are likely to see long-term gains in efficiency, profitability, and competitiveness.
With the right approach and expertise, capital allowances can be transformed from a routine tax function into a powerful tool for growth and optimisation. As with any tax relief, the key to maximising value lies in detail.
At Myriad, we’ve been helping businesses fund their innovation for over 20 years. Our friendly team is here to support you and boost your chances of success. Feel free to get in touch with us to explore how we can help you maximise and secure capital allowance funding opportunities for your business. We’d love to chat!
Unlock tax savings with capital allowances—your guide to smarter investments for innovative, R&D-driven businesses.
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