For corporation tax purposes, a company which disposes of (or is deemed to dispose of) an asset acquired on or after 31 March 1982 receives an indexation allowance which is deductible from any chargeable gain. The allowance is calculated by multiplying the base cost of the asset by the change in the retail price index from the date when such expenditure was incurred to the date of disposal (or deemed disposal). The purpose of indexation allowance is to eliminate the effect of inflation in the chargeable gains calculation.

Following an announcement in the Autumn 2017 Budget, the allowance was frozen for corporation tax purposes with effect from 31 December 2017 (see section 26, Finance Act 2018). Therefore, for disposals of assets on or after 1 January 2018, the indexation figure that companies can deduct covers only the movement in the RPI from the date of acquisition of the asset to 31 December 2017.

For capital gains tax purposes, no indexation allowance is available in respect of gains coming into charge after 5 April 2008.