For companies investing in plant, machinery, and equipment, the UK capital allowances regime in 2026 is more generous than at any point in living memory. Full Expensing, originally introduced as a temporary measure, has been made permanent. The Annual Investment Allowance (AIA) remains at £1 million. For most capital expenditure by trading companies, the result is 100% relief in year one.
Full Expensing — the headline
Companies (not unincorporated businesses) buying qualifying new and unused plant and machinery can claim:
- 100% first-year allowance on most main-rate pool assets.
- 50% first-year allowance on special-rate pool assets (long-life assets, integral features, thermal insulation).
Full Expensing applies to new and unused assets only. Used and second-hand assets do not qualify — but they may still get full relief under the AIA.
Annual Investment Allowance — the all-purpose tool
The AIA gives 100% first-year relief on the first £1,000,000 of qualifying capital expenditure per year. Key features:
- Available to companies, partnerships of individuals, and sole traders.
- Covers new and second-hand assets.
- Includes main-rate and special-rate pool assets.
- Group-wide cap for connected companies — the £1m is shared across the group.
For most SMEs, the AIA is more flexible than Full Expensing because it covers second-hand assets. We typically apply the AIA first, then Full Expensing for additional new asset spend above £1m.
What qualifies as plant and machinery?
- Computers, servers, IT equipment.
- Office furniture and fittings (the "function" test — fixtures that are part of the setting are restricted).
- Machinery, tools, and production equipment.
- Commercial vehicles (vans, lorries, trucks — but generally not cars).
- Solar panels, EV charging points, certain energy-efficient equipment (often special-rate pool).
Cars — different rules
Cars are excluded from the AIA and Full Expensing. They are written down at the main pool rate (18%) or special-rate pool rate (6%) depending on CO2 emissions:
- Zero-emission cars: 100% first-year allowance (separate first-year allowance category, available until at least April 2026 — check current Budget for extensions).
- CO2 emissions up to 50g/km: 18% main pool.
- CO2 emissions over 50g/km: 6% special-rate pool.
Combined with the very low 1–2% benefit-in-kind rates for electric company cars, salary-sacrificed EVs remain one of the most tax-efficient employee benefits available. The BIK rates rise gradually over coming years.
Integral features and the special-rate pool
"Integral features" include electrical systems, lighting, hot and cold water systems, lifts, escalators, and heating, ventilation and cooling systems. These attract 50% first-year allowance under Full Expensing or full AIA cover — but the balance written down at the special-rate pool rate of 6%.
Capital allowances analyses on commercial property purchases regularly identify hundreds of thousands of pounds of previously unclaimed integral features. Buyers of commercial property who don't run a CA review at acquisition often leave significant relief on the table.
Disposals and balancing charges
If you sell an asset on which Full Expensing was claimed, the full disposal proceeds become a taxable balancing charge in the year of disposal. This is symmetrical to the upfront relief, but it does create a cash flow consideration if you sell soon after acquisition. The AIA does not produce the same balancing charge — disposals go through the normal pool.
Timing strategy
For owner-managed companies near the £50,000 small profits limit or near the £250,000 main rate threshold, accelerating capital expenditure can pull taxable profit out of higher marginal bands. We routinely model capex timing as part of corporation tax planning — sometimes a £30,000 piece of equipment bought in February rather than May saves several thousand pounds in corporation tax by keeping the company in a lower band.
Cash flow vs. profit and loss
Full Expensing and AIA are tax timing measures, not absolute tax savings. They accelerate relief into year one rather than spreading it over the asset's life. For a profitable, going-concern business, that timing benefit is meaningful — the present value of the relief is significantly higher when claimed upfront.
The downside: heavy first-year capital allowances can push a company into a tax loss. Losses can be carried back one year (for terminal loss relief, three years) or forward indefinitely against future profits. We model the loss usage and carry-back implications before recommending heavy first-year claims.
Sole traders and partnerships — Full Expensing does not apply
Unincorporated businesses cannot claim Full Expensing, but they can use the AIA up to £1m. For sole traders considering incorporation, the availability of Full Expensing on top of AIA is one of several arguments in favour — though personal tax considerations usually dominate the decision.
Action checklist
- Are you planning capex in the next 12 months? Model the corporation tax saving alongside cash flow.
- If you bought commercial property in the last two years without a capital allowances review, get one done — claims can still be made.
- EV company cars and charging infrastructure: combine 100% FYAs, low BIK, and salary sacrifice.
- Connected companies: confirm the AIA group cap allocation.
Our business advisory team integrates capital allowances planning with annual accounts and corporation tax. Book a capex tax review before signing your next major purchase order.