Capital expenditure: What you need to know before 2025

As the calendar year draws to a close, sole traders and partners will be thinking about closing out the 2024/25 tax year and planning ahead for 2025/26.

If you are considering investing in tangible assets (buildings, plant & machinery) for your business, understanding how and when such capital expenditure attracts tax relief is really important.

The UK tax system is designed to provide tax relief for most items of capital expenditure, but the amount and timing of relief will depend upon:

The type of spend
How the purchase will be financed
The timing of the expenditure.

All three points can significantly influence the amount and timing of any available tax relief. Advice should therefore be sought from your tax adviser on these points if you are considering any significant capital spending decisions.

The Annual Investment Allowance

The Annual Investment Allowance (AIA) remains a significant aspect of the capital allowance system for smaller businesses who invest in qualifying plant & machinery.

“Permanently” set at £1 million from April 2023, the AIA allows businesses to claim 100 per cent tax relief on qualifying expenditure incurred within the tax year.

Eligible items may include:

Plant and machinery (e.g., office equipment, manufacturing equipment, or tools)
Commercial vehicles such as vans and lorries (but not cars, nor, from next April, double cab pickups)

Any investment in qualifying assets must be made and brought into use before the year-end to benefit.

First-year allowances: 50 per cent relief

Spend on special-rate assets such as integral features (including heating systems, lighting and air conditioning systems) and long-life assets will generally attract the AIA. Indeed, AIA should normally be claimed on special rate assets in priority to main rate assets.

There is also a 50 per cent first-year allowance (FYA) available for special rate assets, but in the majority of cases small businesses will be able to claim 100 per cent relief via the AIA, so the FYA is rarely claimed by the smallest businesses these days.

Assets in the special rate pool (that have not been fully relieved via the AIA or FYA) can then be written down annually at 6 per cent in subsequent years.

Expenditure on cars does not attract the AIA or 50 per cent FYA.

What about vehicles? *

The rate of relief for the cost of acquiring vehicles varies depending on emissions:

Zero-emission vehicles: Brand-new electric cars qualify for a 100 per cent FYA until April 2025, making them an attractive option for businesses transitioning to greener fleets.
Low-emission vehicles (up to 50g/km CO₂): These typically fall under the main rate pool, with relief at 18 per cent per year.
High-emission vehicles (above 50g/km CO₂): Relief is limited to the special rate pool, with only 6 per cent of the cost deductible annually.

It’s worth noting that commercial vehicles like vans and lorries qualify for AIA, offering immediate tax relief.

*If you are thinking of buying a double cab pickup, you may be aware that the Government recently made changes to the tax relief available on these vehicles. Please click here to read our article on double cab pickups and whether they are still a good investment.

Full expensing

Unincorporated businesses cannot claim full expensing relief.

That said, now that the AIA is set at £1m per tax year, the vast majority of unincorporated businesses will be able to achieve the same result as ‘full expensing’ by claiming the AIA.

Structures and buildings allowance

Expenditure on specific structures and buildings, that does not attract relief under the rules for plant & machinery / integral features, may instead attract relief through Structures and Buildings Allowance (SBA), at a rate of 3 per cent per annum.

SBA does not apply to spend on residential property.

Strategic timing: why it matters

Timing is an important consideration, and the end of the financial year is a critical deadline for businesses to make purchases that reduce their taxable profits.

For example:

Any asset purchased but not brought into use before the financial year-end may not qualify for relief in that period.
Postponing purchases until after the year-end may mean waiting another 12 months for tax relief.
Conversely, accelerating capital spend into the current tax year may therefore accelerate tax relief.