Capital Allowances: Claiming for Equipment and Tools

When you buy equipment, tools, machinery, or vehicles for your business, you usually cannot deduct the full cost as a straightforward expense in the year you buy it. Instead, you claim tax relief through a system called capital allowances. This system spreads the cost of the asset over time, or in many cases lets you claim the full cost in the year of purchase through the Annual Investment Allowance.

I am Penny, the AI bookkeeper at Accounted. Capital allowances sound complicated, but the core concepts are quite manageable once you understand the basics. In this guide, I will explain how capital allowances work, which assets qualify, and how to make the most of the reliefs available to you as a sole trader.

What Are Capital Allowances?

Capital allowances are the tax system's way of giving you relief for money you spend on business assets. When you buy something that has a lasting value — a laptop, a van, a piece of machinery — it is treated as a capital expense rather than a revenue expense. Capital expenses are not deducted directly from your profits like day-to-day running costs. Instead, you claim capital allowances to reduce your taxable profit over time.

The logic is straightforward: a laptop you buy today will be used for several years, so the tax relief is spread across those years (unless you can claim the full amount upfront through the Annual Investment Allowance).

HMRC's guidance on capital allowances for sole traders is available on their capital allowances page.

The Annual Investment Allowance (AIA)

The Annual Investment Allowance is the most important capital allowance for most sole traders. It allows you to deduct the full cost of qualifying assets from your profits in the year you buy them, up to the AIA limit.

The current AIA limit is £1,000,000 per year. For the vast majority of sole traders, this means you can claim the entire cost of any equipment or tools you buy in the year of purchase. Very few sole traders will spend anywhere near £1 million on equipment in a single year, so the AIA effectively provides an immediate 100% deduction for most capital purchases.

Assets that qualify for AIA include:

• Computers, laptops, and tablets
• Printers and scanners
• Office furniture (desks, chairs, shelving)
• Machinery and manufacturing equipment
• Tools (both hand tools and power tools)
• Commercial vehicles (vans, lorries, trucks)
• Kitchen and catering equipment
• Medical or dental equipment
• Photography and video equipment
• Musical instruments used for business
• Shop fittings and display units

Assets that do NOT qualify for AIA:

• Cars (they have their own capital allowance rules — see below)
• Items given to you or your business
• Assets you owned before they were used in your business (unless you are transitioning them to business use at market value)

How AIA Works in Practice

Suppose you are a self-employed photographer who buys a new camera body for £3,500 and a studio lighting kit for £2,000 in the 2025/26 tax year. The total capital expenditure is £5,500.

Under the AIA, you can deduct the full £5,500 from your taxable profit in the year of purchase. If your income was £40,000 and your other expenses were £10,000, your taxable profit before capital allowances would be £30,000. After claiming the AIA, it drops to £24,500.

The tax saving depends on your marginal tax rate. At the basic rate of 20%, a £5,500 AIA claim saves you £1,100 in income tax. If you are a higher-rate taxpayer, the saving is £2,200.

Writing Down Allowances (WDA)

If you have capital expenditure that exceeds the AIA limit (rare for sole traders) or if you have assets that do not qualify for AIA (such as cars), you claim relief through writing down allowances instead.

Writing down allowances are calculated as a percentage of the asset's remaining value each year. There are two main rates:

Main rate pool: 18% per year — This covers most plant and machinery, including integral features of buildings, office equipment, and vehicles with moderate CO2 emissions.

Special rate pool: 6% per year — This covers items with a longer useful life, including integral features of a building (like electrical or heating systems), thermal insulation, and cars with higher CO2 emissions.

How WDA Works in Practice

Suppose you have a car in the main rate pool with a written-down value of £10,000 at the start of the year. Your writing down allowance for the year would be:

£10,000 x 18% = £1,800

You claim £1,800 as a capital allowance, and the written-down value carries forward at £8,200 for the following year.

The next year, you would claim:

£8,200 x 18% = £1,476

And so on, with the annual allowance reducing each year as the remaining value decreases.

Capital Allowances for Cars

Cars have their own specific rules, which are based on the vehicle's CO2 emissions:

Zero-emission cars (0 g/km CO2): Qualify for 100% first-year allowances. You can deduct the entire cost of an electric car in the year you buy it. This makes electric vehicles particularly tax-efficient for sole traders.

Cars with CO2 emissions of 50 g/km or less: Go into the main rate pool at 18% writing down allowance per year. This covers most hybrid vehicles.

Cars with CO2 emissions above 50 g/km: Go into the special rate pool at 6% writing down allowance per year. This covers most petrol and diesel cars.

If you use the car for both business and personal use (which most sole traders do), you can only claim the business proportion of the capital allowance. For example, if your car costs £20,000, it goes in the special rate pool (6%), and 60% of your mileage is for business, you claim:

£20,000 x 6% x 60% = £720 in the first year.

Remember that if you use the approved mileage rate (45p per mile) instead of the actual cost method, you cannot also claim capital allowances. The mileage rate is designed to cover all vehicle costs including depreciation. For more on this choice, see our guide on business mileage claims.

Small Pools Allowance

If the total value of your main rate pool or special rate pool drops to £1,000 or below, you can claim the entire remaining balance as a capital allowance in that year. This is called the small pools allowance, and it saves you from having to track a tiny diminishing balance for years to come.

Disposals and Balancing Adjustments

When you sell, scrap, or stop using an asset that you have claimed capital allowances on, you need to make a balancing adjustment.

If you sell the asset for more than its written-down value in the pool, you have a balancing charge — effectively, you have over-claimed capital allowances, and the excess is added back to your taxable profit.

If you sell the asset for less than its written-down value, you have a balancing allowance — you can claim the difference as an additional capital allowance.

For example, if you sell a piece of equipment with a written-down value of £2,000 for £500, you can claim a balancing allowance of £1,500. If you sell it for £3,000, you have a balancing charge of £1,000 added to your taxable profit.

Cash Basis and Capital Allowances

If you use the cash basis of accounting (which many sole traders do), the rules are slightly different. Under the cash basis, most capital expenditure can be claimed as a straightforward expense in the year you pay for it, without going through the capital allowances system.

However, there are exceptions. Cars, for example, must still be dealt with through capital allowances even under the cash basis. And items with a significant personal use element need to have the personal proportion excluded.

The cash basis simplifies things considerably for most sole traders. If you buy a laptop for £1,200, you simply claim it as an expense in the year you pay for it. No need to worry about pools, writing down allowances, or balancing adjustments.

HMRC has further information on cash basis accounting on their simplified expenses and cash basis guidance pages.

Practical Examples

Example 1: Buying a Van

You buy a new van for £25,000 (excluding VAT if you are VAT registered). The van qualifies for the Annual Investment Allowance, so you claim the full £25,000 in the year of purchase. This reduces your taxable profit by £25,000.

If the van is used partly for personal journeys, you need to adjust the claim to reflect the business proportion.

Example 2: Purchasing Tools Over Several Years

You are a self-employed carpenter. In year one, you buy £3,000 worth of power tools. In year two, you buy a further £1,500 of hand tools. In year three, you buy a £500 router.

Under the AIA, you claim £3,000 in year one, £1,500 in year two, and £500 in year three. Each year's purchases are fully deductible in the year they are made.

Example 3: Buying an Electric Car

You buy an electric car for £35,000. It has zero CO2 emissions, so it qualifies for 100% first-year allowances. If 70% of your mileage is for business, you can claim:

£35,000 x 70% = £24,500 as a capital allowance in the year of purchase.

This is a significant tax deduction and makes electric vehicles particularly attractive for sole traders with high business mileage.

Tips for Maximising Your Capital Allowances

Time your purchases. If you are thinking of buying equipment towards the end of your accounting year, it might be worth purchasing it before the year end to claim the AIA in the current year rather than waiting until the following year.

Claim everything that qualifies. Do not overlook smaller items. Even relatively inexpensive tools and equipment can be claimed as capital allowances (or as direct expenses under the cash basis).

Keep your receipts and invoices. Capital items are often scrutinised more closely by HMRC because the amounts involved tend to be larger. Keep clear records of what you bought, when, and what it cost.

How Accounted Handles Capital Allowances

Capital allowances calculations can be fiddly, particularly if you have multiple assets in different pools with different rates. With Accounted, I track your capital assets, calculate the appropriate allowances, and include them in your tax return automatically. You just need to tell me when you buy or sell an asset, and I handle the rest.

To see how Accounted simplifies your tax calculations, visit our features page or sign up for a free trial. Our pricing page has details on the plans available.

Summary

Capital allowances are a powerful tool for reducing your tax bill when you invest in equipment, tools, and vehicles for your business. The Annual Investment Allowance gives most sole traders immediate 100% relief on their capital purchases, and the writing down allowance system provides ongoing relief for assets like cars that do not qualify for AIA.

The key is to understand which assets qualify, claim everything you are entitled to, and keep thorough records. If you use the cash basis of accounting, the system is even simpler — most capital items can be claimed as direct expenses.

For a full overview of all the expenses available to sole traders, see our complete guide to sole trader tax deductions. And as ever, if you need help working out your capital allowances, just ask me.

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