Capital Allowances Explained: AIA, Full Expensing & WDA

Capital allowances replace accounting depreciation for tax purposes. When your business buys equipment, vehicles, or fixtures, you can't simply deduct the cost as a business expense. Instead, HMRC provides specific reliefs – Annual Investment Allowance (AIA), Full Expensing, and Writing Down Allowances (WDA) – each with different rules on what qualifies, how much you can claim, and when.

Choosing the wrong allowance – or failing to claim at all – is one of the most common and costly mistakes UK businesses make. A company buying £1.5m of new equipment could save an additional £125,000 in Corporation Tax by using Full Expensing instead of relying solely on AIA. Conversely, a sole trader buying second-hand machinery has no access to Full Expensing and must use AIA or fall back on WDA.

The landscape changed significantly in April 2023 when Full Expensing was introduced, and again in 2024 when it was made permanent. Understanding how these reliefs interact is essential for any business planning capital expenditure.

Annual Investment Allowance (AIA) in Detail

The AIA is the most widely available capital allowance. It provides 100% tax relief in the year of purchase on qualifying plant and machinery up to £1,000,000 per year. This limit is permanent from April 2023 and applies to all UK businesses – sole traders, partnerships, and limited companies alike.

AIA covers both new and second-hand assets, making it the go-to relief for most businesses. Qualifying items include office equipment, tools, commercial vehicles, computer hardware, manufacturing machinery, and integral features of buildings. However, cars are excluded – they must be claimed through the WDA pools instead.

If you have associated companies (companies under common control), the £1m AIA limit is shared between them. For example, three associated companies would each have an AIA limit of approximately £333,333.

Any expenditure exceeding your AIA limit enters the appropriate WDA pool – main pool at 18% or special rate pool at 6% per year on a reducing-balance basis.

Full Expensing in Detail

Full Expensing was introduced in April 2023 and made permanent from April 2024. It allows UK companies to deduct 100% of the cost of new main-pool plant and machinery from taxable profits – with no annual cap. This makes it the most generous capital allowance for companies investing heavily in new equipment.

For special-rate assets (integral features, long-life assets, thermal insulation), Full Expensing provides a 50% First-Year Allowance (FYA). The remaining 50% enters the special rate pool at 6% WDA per year. This is less generous than AIA, which gives 100% relief on special-rate assets within the £1m cap.

Key restrictions: Full Expensing only applies to (1) new assets (not second-hand), (2) purchased by incorporated companies (not sole traders or partnerships), and (3) not intended for leasing. Cars are also excluded.

If you dispose of a Full Expensing asset, the sale proceeds are added back to taxable profits as a balancing charge – preventing the double benefit of upfront relief and sale proceeds.

Writing Down Allowances (WDA) in Detail

Writing Down Allowances are the fallback relief for assets that don't qualify for AIA or Full Expensing, or for expenditure exceeding the AIA limit. They work on a reducing-balance basis: each year you deduct a percentage of the remaining pool value, so the actual deduction shrinks over time.

There are two WDA rates: 18% per year for the main pool (general plant and machinery) and 6% per year for the special rate pool (integral features, long-life assets, thermal insulation). Cars enter one of these pools depending on their CO₂ emissions.

WDA Example: £100,000 in the Main Pool

After 10 years at 18% WDA, only £88,727 of the original £100,000 has been claimed. This illustrates why AIA and Full Expensing – which give 100% relief in Year 1 – are vastly more tax-efficient when available.

Common Capital Allowances Mistakes

• Claiming AIA on cars: Cars are excluded from AIA entirely. They must go through WDA pools. This is one of the most frequent errors on Corporation Tax returns.
• Using Full Expensing for second-hand assets: Full Expensing only applies to new assets. Buying used equipment? Use AIA instead.
• Forgetting to share AIA between associated companies: If you have multiple companies under common control, the £1m AIA limit is divided between them.
• Overlooking integral features: Electrical systems, lifts, heating, and cold water systems within buildings are claimable as special-rate assets – but many businesses miss them entirely.
• Not timing purchases: Buying equipment just before your year end means you claim the full AIA immediately. Buying just after means waiting a full year for the same relief.