Capital Allowances: Claiming Tax Relief on Equipment and Vehicles

---

If you are self-employed or run a small business in the UK, buying equipment, machinery or a vehicle can be a significant expense. However, the tax system may allow you to claim tax relief on qualifying purchases through capital allowances.

Capital allowances can be particularly useful when you invest in items that you expect to use in your business for more than a short period, such as computers, tools, machinery, office equipment, vans and certain cars. The rules can be quite different from the normal rules for claiming everyday business expenses, so it is important to understand what you can claim and how the claim works.

What are capital allowances UK?

Capital allowances are a form of tax relief that allows a business to deduct the cost of certain assets from its taxable profits. They generally apply to items known as plant and machinery, which can include equipment, computers, machinery, tools and vehicles used in the business.

For example, if your business buys a computer for £1,500 that qualifies for capital allowances, you may be able to claim tax relief on some or all of that cost rather than simply treating the purchase as an ordinary business expense.

The important point is that buying an asset for your business is not always treated in the same way as buying something like stationery, advertising or accountancy services. Capital expenditure is normally dealt with through the capital allowances rules rather than being deducted directly as an ordinary business expense.

If you are unsure about the difference between the two, our guide to capital vs revenue expenses in the UK explains why the distinction matters when preparing your accounts and calculating taxable profits.

How do capital allowances work for self employed businesses?

For capital allowances for self employed people, the basic idea is that qualifying capital expenditure can reduce the taxable profit on which Income Tax and, where applicable, National Insurance are calculated.

A sole trader using traditional accounting can generally claim capital allowances on qualifying equipment and vehicles used for the business. However, there are important differences if you use the cash basis.

For example, under the cash basis, most plant and machinery expenditure is normally dealt with differently, while cars are subject to specific capital allowance rules. HMRC confirms that sole traders and partnerships using the cash basis can claim capital allowances on business cars, but not generally on other plant and machinery.

This means you should not automatically assume that every expensive item you buy for your business should be entered as a capital allowance. Your accounting method and the type of asset can affect how the tax relief is calculated.

What can you claim capital allowances on?

Capital allowances can apply to many items that a business buys and keeps for use in the business, including computers, tools, machinery, office equipment and certain fixtures and integral features. Vehicles can also qualify, although cars have their own special rules.

For many types of equipment, the Annual Investment Allowance (AIA) can be particularly valuable. The AIA currently allows qualifying businesses to deduct up to £1 million of qualifying expenditure from taxable profits, subject to the relevant rules.

However, business cars do not qualify for the AIA, so you need to look at the separate rules for cars when calculating the available tax relief.

What are capital allowances for cars?

Capital allowances for cars depend mainly on when the car was purchased and its CO₂ emissions.

Unlike many other types of business equipment, cars do not qualify for the Annual Investment Allowance. Instead, cars generally qualify for writing down allowances, with the applicable rate depending on the vehicle.

For cars bought from April 2021 onwards, a new or used car with CO₂ emissions of more than 50g/km generally falls into the special rate pool, while a car with emissions of 50g/km or less generally qualifies for the main rate.

There is an important exception for qualifying new and unused electric cars and cars with zero CO₂ emissions, which can potentially qualify for a 100% first-year allowance.

If you use a car partly for your business and partly for private journeys as a sole trader or partnership, the amount of capital allowances you can claim must be reduced to reflect the private use.

How do capital allowances for vans work?

Capital allowances for vans are generally more straightforward than the rules for cars because vans and other goods vehicles are not treated as cars for capital allowance purposes.

A qualifying van used in the business can generally qualify for the Annual Investment Allowance, meaning that, where the conditions are met, the business may be able to deduct the full qualifying cost from its taxable profits in the year of purchase.

This can make a significant difference where a self-employed person buys an expensive van for their trade. For example, a self-employed builder who buys a qualifying £30,000 van for business use may be able to claim the qualifying cost through the AIA rather than spreading the relief over several years.

However, the exact treatment depends on the accounting method, how the vehicle is used and whether there is any private use, so the purchase should be considered carefully before the tax return is prepared.

Can you claim capital allowances for electric cars?

Yes, electric cars can receive favourable capital allowance treatment, but there are conditions that need to be met.

A new and unused electric car, or a new and unused car with zero CO₂ emissions, can qualify for a 100% first-year allowance, provided the relevant conditions are satisfied. HMRC currently states that this relief is available for qualifying purchases made before April 2027.

A 100% first-year allowance means that the qualifying cost can be deducted from taxable profits in the year the allowance is claimed. For example, if a sole trader buys a qualifying new electric car for £35,000 and the entire cost qualifies, the capital allowance could potentially reduce taxable profits by £35,000.

This does not mean the car is “free” or that the business receives £35,000 back from HMRC. Instead, the £35,000 deduction reduces the profits on which tax is calculated.

It is also important to distinguish a new electric car from a second-hand electric car. A second-hand electric car does not generally receive the same 100% first-year allowance and is instead subject to the relevant main-rate rules.

Can self employed people claim mileage instead of capital allowances?

Yes, in certain circumstances a sole trader or qualifying partnership can choose to use simplified vehicle expenses instead of calculating the actual vehicle costs and claiming capital allowances.

For the 2026/27 tax year, the simplified mileage rate for cars and goods vehicles is 55p per business mile for the first 10,000 miles, followed by 25p per mile after 10,000 miles.

For example, if you drive 8,000 business miles during the tax year, the simplified calculation would be:

8,000 × 55p = £4,400

The simplified method can be easier because you do not need to calculate the actual fuel, insurance, repairs and other running costs separately.

However, you cannot use simplified expenses for a vehicle if you have already claimed capital allowances for that vehicle. Once you choose the simplified mileage method for a vehicle, there are also rules about continuing to use that method while the vehicle remains in business use.

If you are considering using your own car for business, our guide on using a personal vehicle for your own business explains some of the issues you should consider.

What happens if I use the asset privately?

If you are a sole trader and an asset is used for both business and private purposes, you cannot normally claim 100% of the available capital allowance for the entire asset.

Instead, the claim needs to reflect the business use.

For example, imagine that you buy a £2,000 computer and use it 80% for your business and 20% privately. If the relevant capital allowance would otherwise be £2,000, the amount available for the business could potentially be restricted to £1,600 to reflect the 80% business use. HMRC specifically gives the principle that capital allowances need to be reduced where an asset is also used outside the business.

Keeping reasonable records of business and private use is therefore important, particularly for vehicles and other assets that are regularly used personally.

Can you claim capital allowances on a vehicle bought on finance?

Buying an asset through finance does not automatically prevent you from claiming capital allowances.

For example, where an asset is bought under a qualifying hire purchase arrangement, HMRC allows the business to claim the relevant capital allowance treatment on the qualifying cost, subject to the rules. Interest and finance costs are treated separately.

The accounting and tax treatment can become more complicated where there is finance involved, so it is important to keep the purchase agreement, invoices and finance documents.

What happens when you sell an asset?

Capital allowances do not necessarily end when you sell an asset.

If you previously claimed capital allowances and subsequently sell the equipment, vehicle or other asset, the disposal proceeds can affect the capital allowance calculation. Depending on the circumstances, this can result in a balancing charge or a balancing allowance.

For example, if you claimed significant tax relief when purchasing an asset and later sell it, you may have to bring the disposal proceeds into the capital allowances calculation. This is one reason why the tax relief received when buying an asset should not be viewed in isolation.

How do you claim capital allowances?

For a sole trader, capital allowances are generally claimed through the Self Assessment tax return. Partnerships claim them through the partnership tax return, while limited companies deal with them through the Company Tax Return and a separate capital allowances calculation.

You should keep invoices, purchase agreements, finance documents and evidence showing how the asset is used by the business, particularly where there is any private use.

It is also important to claim the correct allowance in the correct accounting period. For example, AIA and first-year allowances generally need to be claimed for the period in which the qualifying expenditure is incurred.

Are capital allowances the same as business expenses?

No. This is one of the most important points to understand.

Ordinary business expenses such as advertising, accountancy fees, insurance and many day-to-day running costs are generally deducted from business income when calculating taxable profit.

Capital expenditure on assets that the business keeps and uses, such as computers, equipment and vehicles, is generally dealt with under the capital allowances rules instead.

The distinction is important because claiming the wrong treatment can lead to an incorrect tax calculation. If you are self-employed and regularly buy equipment for your business, it is worth understanding the difference between ordinary expenses and capital expenditure rather than simply putting every purchase into the same expense category.

For more examples of ordinary business costs, see our guide to what self-employed expenses you can claim.

Is it always best to claim the maximum capital allowance?

Not necessarily.

Although claiming the maximum available relief can reduce your taxable profit for the year, there can be situations where a business may choose not to claim the full amount available, depending on its circumstances.

HMRC allows businesses in some situations to claim part of an allowance and use writing down allowances instead.

For a sole trader, the decision may depend on the level of current profits, other income, tax rates and the expected position in future years. This is particularly relevant where a large asset purchase could create a significant reduction in taxable profits.

Capital allowances can therefore be a useful part of tax planning, but the decision should be based on the overall tax position rather than simply choosing the biggest deduction available.

Final thoughts on capital allowances

Capital allowances can provide valuable tax relief when a UK business invests in equipment, machinery, vans and cars, but the rules are not the same for every type of asset.

For many types of equipment, the Annual Investment Allowance can provide immediate relief, while cars are subject to separate rules based largely on their CO₂ emissions. New qualifying electric cars can receive particularly favourable treatment through the 100% first-year allowance, while vans and other qualifying goods vehicles can potentially benefit from the Annual Investment Allowance.

For self-employed people, it is also important to consider whether traditional accounting or the cash basis is being used and whether simplified mileage expenses might be more appropriate for a vehicle.

The rules can become complicated when an asset has both business and private use, when finance is involved, or when an asset is later sold, so keeping good records and choosing the correct tax treatment is essential.

Tax rules and allowances can change, so this article is intended as general UK tax information rather than advice for a specific business. Always check the current HMRC rules or speak to a qualified accountant about your individual circumstances.

---