As a business owner, deciding when to invest in equipment, vehicles or machinery is never straightforward.
You want your business to grow and run more efficiently, but you also need to manage cashflow carefully and avoid paying more tax than necessary.
What many owners don’t realise is that the tax rules for larger purchases work very differently from day-to-day expenses and the timing of your investment can make a real difference.
Most people assume that buying a van, machine or computer is automatically tax-deductible.
…It isn’t.
Because these assets provide value over several years, HMRC doesn’t treat them as routine costs. Instead, these bigger purchases fall under a separate set of rules called capital allowances.
There are several types of specialist capital allowances (such as Structures & Buildings Allowances or agricultural allowances), which apply in specific industries or situations. To keep this guide practical and relevant, we’re focusing only on the core allowances that most SMEs use when buying equipment, vehicles, and machinery.
Capital allowances allow you to deduct some or all of an asset’s cost from your profits, reducing the tax you pay. Depending on the type of asset and the relief available, this can mean 100% tax relief in the year you buy it or, if it doesn’t qualify for immediate relief, the cost is deducted gradually over several years.
Typical qualifying items include:
- Equipment, tools and machinery
- IT hardware and software
- Office furniture
- Vans and commercial vehicles
- Manufacturing and production equipment
- Certain building fixtures
With the November 2025 Budget updating several allowance rules and a new First-Year Allowance arriving in April 2026, understanding how capital allowances work has never been more important. Getting the order right, and choosing the right year to invest, can significantly improve your cashflow and reduce your tax bill.
Understanding the Pools Before You Claim Relief
When you buy a capital asset, HMRC places it into one of two core “pools”. This simply determines the default rate of tax relief if no faster allowance applies.
Main Pool Assets
These are the everyday items most businesses buy, such as:
- Computers and IT
- Machinery and tools
- Office furniture
- Vans used only for business
If no other relief is used, these receive tax relief gradually at 18% a year. From April 2026 this rate reduces to 14%. For businesses with existing assets in the main pool, they will experience a slowing down of the tax relief from April 2026 on these assets.
Special Rate Pool Assets
These are assets that last longer or form part of a building, such as:
- Electrical or water systems
- Heating and air-conditioning
- Lifts and escalators
- Long-life assets
- Certain higher-emission cars
Without any other relief, these receive relief at 6% a year.
Most businesses don’t want to wait years to get their tax relief, which is why the government introduced faster, more generous allowances.
Annual Investment Allowance (AIA)
AIA is the simplest and most generous relief for both Limited companies and the self-employed.
AIA provides 100% tax relief in the year of purchase on qualifying assets up to £1 million a year and applies to:
- Main pool assets
- Special rate assets
- New or used equipment.
- Fixtures in buildings
It does not apply to cars (except new zero-emission models).
Because AIA covers the widest range of assets, most businesses use this allowance first.
Full Expensing
Full expensing is available only to limited companies and only for new main-rate assets.
The business receives 100% relief immediately, with no annual limit.
It applies to:
- New equipment
- New plant and machinery
- New commercial kit used solely for business
It does not apply to:
- Used equipment
- Special rate assets
- Cars
- Assets that will be leased out
Companies normally use AIA first (because it covers more types of assets), then use full expensing for any remaining qualifying spend.
The New 40% First-Year Allowance (FYA) —
A new 40% First-Year Allowance (FYA) for capital expenditure is being introduced from 1 January 2026. This new allowance is available to both companies and unincorporated businesses for qualifying new plant and machinery that doesn’t currently benefit from other immediate reliefs.
It covers most new and unused “main rate” plant and machinery and specifically includes assets for leasing (which were previously excluded from many FYAs). Second-hand assets, cars, and assets for leasing overseas do not qualify for this new allowance.
The 40% FYA gives:
- 40% immediate relief in year one, and
- The remaining 60% goes into the main pool at 18% (14% from April 2026)
This allowance is especially useful when:
- Your AIA limit has already been used
- You’re buying assets that don’t qualify for full expensing
- You still want some meaningful upfront relief rather than waiting years through slow writing-down allowances.
Putting It All Together — The Logical Order to Claim Capital Allowances (With Examples)
Once you know the different types of relief, the next step is deciding which one to use first. This ensures you claim the fastest relief first.
Step 1: Use AIA first
Because AIA offers 100% relief and applies to the widest range of assets.
Example 1: IT Upgrade (Main Pool)
A consultancy buys £30,000 of new laptops.
Laptops = main pool asset
AIA available → 100% immediate relief
If profits are high this year, buying before year-end gives a bigger tax saving than delaying.
Step 2: For companies, use full expensing next
If you’re a limited company and you’ve used up AIA, the next port of call is full expensing on new main-rate assets.
Example 2: Large Machinery Investment (New, Main-Rate)
A company plans to spend £1.8m on new machinery.
First £1m → covered by AIA
Remaining £800,000 of new main-rate machinery → use full expensing
Any non-qualifying part may fall to FYA or the pools
This sequence ensures the full 100% relief is secured where possible.
Step 3: From April 2026, use the new 40% FYA
Only for new main-rate assets, and only when AIA and FE aren’t available.
Example 3: New Machinery, Non-Company or No Access to FE
A manufacturing partnership invests £400,000 in new machinery.
AIA already used
Full expensing unavailable (not a company)
New machinery qualifies for 40% FYA
Tax relief:
£160,000 (40%) in year one
£240,000 added to the main pool
This gives a much better result than relying just on writing-down allowances.
Step 4: Anything left goes into the pools
Main pool → 18% (14% from April 2026)
Special rate pool → 6%
These give slower, long-term relief.
Example 4: Building Fit-Out (Special Rate)
A business invests £90,000 in electrics and air-conditioning both special rate assets.
If AIA is available → claim 100% now
If AIA is already used → only 6% per year via the special rate pool
In some cases, waiting for April 2026 and the re-setting of the AIA businesses may secure full relief.
Why Timing Matters More Than Ever
The changes taking effect from 2026, especially the new 40% FYA and the reduced writing-down rate for main pool assets make the timing of your investment increasingly important.
Buying in the wrong year could mean:
- Slower relief
- Missed opportunities for 100% deductions
- Paying more tax than necessary
Buying in the right year could mean:
- Full relief instead of 40% or slower
- Using your AIA and FE allowances strategically
- Protecting cashflow and supporting growth
A well-timed investment can save thousands in tax, strengthen cashflow, and accelerate growth. Before you commit to any major purchase, take a moment to review:
- Your expected profits
- Which allowances you can use
- Whether waiting until 2026 is beneficial or costly
- Whether the asset qualifies for AIA, FE or the new FYA
Getting the timing right means your investment works harder for you, saves more tax, and supports the future you’re building.
