Capital allowances enable a business to write off the cost of certain capital assets against taxable income. Capital allowances are available instead of depreciation, which is not allowed as a tax deduction.

Capital allowances are commonly given as writing down allowances (where a specified percentage of pooled qualifying expenditure is tax deductible each year). However, periodically, the government has used allowances as an economic tool to encourage businesses to increase favoured types of capital expenditure. For example, periodically, first-year allowances (FYAs) at enhanced rates (including 100%) have been available for certain types of qualifying expenditure and in some years FYAs have been generally available. In April 2008, the government introduced the annual investment allowance (AIA), which is equivalent to 100% FYAs for qualifying expenditure on plant and machinery capped at a specified level. Although available to all businesses, the AIA replaced FYAs that were available to small and medium-sized enterprises before April 2008.

Enhanced capital allowances (ECAs) are available for qualifying expenditure on designated energy-saving plant and machinery, environmentally beneficial plant and machinery, and plant and machinery for use in a designated assisted area. HMRC sometimes use the terms ECAs and FYAs interchangeably.

There are several different types of capital allowances, including plant and machinery allowances (familiar to most businesses), mineral extraction allowances, research and development allowances, know-how allowances, patent allowances, dredging allowances, assured tenancy allowances and contribution allowances.

Industrial buildings allowances were available for qualifying expenditure on certain buildings and structures but were gradually withdrawn over a period of four years ending in April 2011. They were replaced with structures and buildings allowances which apply (broadly) to qualifying expenditure incurred under contracts made on or after 29 October 2018 (see Practice note, Capital allowances for structures and buildings).

The relevant legislation is contained in the Capital Allowances Act 2001. For more information, see Capital allowances: overview.