Full Expensing: Capital Allowances for UK Businesses

Growing a business often means making big, uncomfortable spending decisions. You know you need to invest in your business to stay competitive, but signing off on a six‑figure asset when cash is already tight can feel like a high-stakes balancing act.

For a long time, the UK tax system didn't make these choices any easier. Capital allowances were a "slow burn," forcing you to shoulder the full cost upfront while tax relief trickled in over several years. It effectively tied up your money when you needed it most.

But with the introduction of full expensing, UK companies now have access to some of the most generous incentives in recent years; what started as a temporary “Super‑Deduction” has become a permanent part of the capital allowance framework.

Table of Contents

What is Full Expensing?

Full expensing is a capital allowance that enables  limited companies to deduct 100% of the cost of qualifying plant and machinery from their taxable profits in the year of purchase. A company paying corporation tax at 25% could save up to 25p for every £1 spent.

Full Expensing Eligibility: Qualifying Plant and Machinery

While full expensing offers a significant tax advantage, you need to be clear on what does and doesn’t qualify for relief. This incentive is specifically reserved for new, unused plant and machinery, and the assets must be used exclusively for the purposes of your trade.

Common examples of qualifying business equipment include:

• Manufacturing machinery
• Computer hardware and servers
• Commercial vehicles (excluding cars)
• Construction equipment
• Office furniture and fixtures
• Certain integral features of buildings

Exclusions: What Doesn’t Qualify?

• Cars – Most cars are not eligible for full expensing. The main exception is zero‑emission vehicles, which can qualify for a separate temporary 100% First-Year Allowance available until March/April 2027.

• Buildings - The cost of the actual building structure doesn’t qualify for this specific relief. Instead, it normally falls under the Structures and Buildings Allowance. However, many of the “integral features” and fixtures inside the building (like lifts, lighting, or air conditioning) can still qualify for other capital allowances.

• Leased Assets - In the past, assets bought to lease out were usually excluded from full expensing and similar tax incentives. From 2026, this changes with the introduction of a new 40% First-Year Allowance for assets used in leasing.
  

Full Expensing vs. AIA: Comparing UK Capital Allowances

Although full expensing often gets most of the attention, it’s just one part of a wider range of capital allowances. Understanding how these work together is especially important if your business uses a mix of new and second-hand equipment, and it can be particularly valuable for sole traders and partnerships that can’t use full expensing.

The Annual Investment Allowance (AIA)

You’ll most often see AIA compared with full expensing... and for good reason. Both let you deduct 100% of the cost in the year you buy the asset, but they’re designed to support different tax and investment strategies.

Unlike full expensing, which is strictly for limited companies, the AIA is the great equaliser. It is available to nearly all UK businesses, including sole traders and partnerships. With a generous £1 million limit, it covers the vast majority of annual capital expenditure for SMEs, applying to both new and second-hand plant and machinery.

The 50% First-Year Allowance (Special Rate)

The New 40% Leasing Extension

From 1 January 2026, there’s a new 40% First-Year Allowance specifically for assets bought to lease out. This brings leased assets more fully into the capital allowances system, making it more worthwhile for businesses that rely on leasing models or run large leased fleets to invest in new equipment. 

At a Glance: Full Expensing, AIA and First‑Year Allowances

The "Clawback": Disposals and Balancing Charges Explained

Capital allowances don’t give you a permanent tax break, they mainly affect when you get tax relief. Full expensing lets you deduct 100% of the cost in the year you buy the asset, but you also need to understand what happens for tax purposes when you later sell it or stop using it.

When an asset that benefited from enhanced relief is sold or disposed of, a "balancing charge" is triggered. Effectively, some or all of the sale value gets added back into your taxable profits for that year. How much this affects you depends on the type of relief you originally claimed, for example:

• 100% Full Expensing: The full sale price of the asset is treated as taxable income in the year you sell it.

• 50% First-Year Allowance: Half of the sale value is taxed straight away, and the other half is used to adjust your 'special rate pool,' which then affects the allowances you can claim in future years.

Accurate asset tracking is key if you want to forecast these clawbacks properly, especially when you’re planning regular fleet or equipment upgrades. If you tend to run assets right to the end of their lifespan, any balancing charge is usually quite small. But if you often swap out high-value equipment, you’ll need to plan for these charges carefully so you’re not caught out by an unexpected tax bill.

Turning Tax Relief into Business Momentum

For businesses considering expansion or upgrading aging equipment, full expensing can be a powerful way to turn your plans into an affordable reality. But, the key is not just claiming the relief, it’s choosing the right timing and order for your investments. Whether you’re buying your first big piece of equipment or planning a full factory upgrade, the way you use full expensing alongside other capital allowances can impact your tax bill by thousands of pounds.

This blog was originally published on: 27/03/2023

Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.