Capital allowances let businesses write off the cost of capital assets, such as plant or machinery, against their taxable income. It’s one of the most generous tax relief schemes of its kind, designed to help grow the UK economy and compete with other markets.
The scheme has incentivised business investment for nearly 150 years, but during this time the rules haven’t stood still; there have been constant alterations to how they work, especially in recent years, when the UK’s business community has needed support through several crises, including a struggling economy, a global pandemic, international conflicts and many other very serious geopolitical shocks. Though there weren’t always as many changes as there are today. Previously, a whole decade or more could pass without a single detail changing.
For those looking to understand both modern and historic changes, in this article, we explore the full history of capital allowances using a helpful timeline that takes us from the beginning (the 1800s) all the way through to the present day.
Pre-1878: No capital allowances
Before 1878, capital allowances didn’t exist. Although, businesses benefitted from deductions when renewing or replacing their existing plant or machinery.
1878: The “wear and tear” allowance
The “wear and tear” allowance enabled companies to claim allowances for the gradual loss in value of plant and machinery that was specifically used for the trade, with the amount based on what was considered ‘just and reasonable’. A similar allowance also applied to mills and factories.
1945: The Income Tax Act 1945
The Second World War created urgent need to rebuild and modernise British industry. So, the Income Tax Act 1945 (“ITA 1945”) introduced a new system of Capital allowances designed to encourage businesses to invest. This involved a 20% initial allowance for plant and machinery, writing-down allowances (“WDAs”) (initially set at 25%), along with balancing allowances and charges when assets were sold. New allowances were also introduced for industrial and agricultural buildings, replacing the previous mills and factories allowance.
1954-1966: Investment allowances
Just under a decade later, in 1954 investment allowances were introduced to encourage entities to purchase new plant and machinery, mining works, industrial and agricultural buildings, and buildings and plant for scientific research use. As these were on top of initial and annual allowances, businesses benefitted more; during the period of ownership, allowances could add up to more than the original cost of the asset.
The investment allowance was set at 10% for agricultural and industrial buildings. For other eligible assets, it was 20%. Investment allowances rates were various during their tenure.
1966: Direct grants
Just over a decade after the introduction of investment allowances, they were replaced by direct grants. These were managed by the Board of Trade. Until 1962, claims were based on a wide range of writing-down allowance rates set out in published lists. To reduce the burden on businesses, these were reduced to three main rates:15%, 20% and 25%, and businesses were allowed to pool expenditure within each category.
1971: Simplification
Only five years later, in 1971 the capital allowances regime saw a major simplification. The number of rates for plant and machinery WDAs were reduced to just one: 25%, and the rules for pooling were extended, largely eradicating the requirement to balance allowances and charges in the process
1984/1985: Initial reforms
In 1984 the UK capital allowances system underwent a major overhaul driven by the then Chancellor of the Exchequer, Nigel Lawson. As part of these changes initial allowances and first-year allowances (FYAs) were phased out over a three-year period. Capital allowances were also aligned more with commercial depreciation rates, with plant and machinery qualifying at 25% and industrial and agricultural buildings at 4%.
1990-2001: Consolidation
While there were no reforms on the scale of 1984 until the 2008 financial crisis, there was the consolidation of the Capital Allowance legislation in 1990. This was consolidated in Capital Allowances Act 1990 (CAA90), with only the legislation on patents and know-how remaining in Income and Corporation Taxes Act 1988 (ICTA88). The consolidation was important as it brought together scattered statutory provisions, including core content such as rules on WDAs and exclusions. Then, in 2000 the legislation was rewritten, resulting in the Capital Allowances Act 2001 (“CAA2001”), where the legislation now sits
In 1996, the capital allowances regime was refined again with the introduction of rules for long-life assets. This change recognised that some items of plant and machinery, particularly those expected to last more than 25 years when new depreciated more slowly than standard assets. To reflect this longer economic life, a reduced allowance rate of 6% was introduced, helping to bring tax relief more closely in line with the asset’s actual commercial depreciation
2008: The Finance Act 2008 (“FA2008”) reforms
It would be more than two decades before another major set of reforms was introduced in 2008. These were part of a wider “Business Tax Reform” package, with a 2% reduction in the main rate of corporation tax . The aims of the reforms were to:
- Incentivise investment and growth
- Lessen distortions and complexity
- Maintain fairness and refocus the tax system for smaller companies
To achieve these ambitions, there were a number of core changes.
1.Annual Investment Allowance (AIA)
This was essentially a 100% allowance when organisations spent on plant and machinery (excluding cars), with a maximum threshold of £50,000 each year, though this rate fluctuated over the years. Since 1 January 2019, the AIA remained at £1 million, becoming permanent from April 2023. There is no restriction based on the size of the organisation ; it applies to sole traders, partnerships, and limited companies. It has substituted the previous 40% or 50% FYAs that were available for small and medium-sized businesses.
2.Small pools allowance
The small pools allowance gave organisations the chance to immediately write off both historic and future pools of plant and machinery costs (on the condition they were £1,000 or less).
3.Payable tax credits
These were for businesses that made losses as a result of incurring expenditure on environmentally beneficial plant and machinery.
4.Phased removal of industrial and agricultural buildings allowances
The removal of these allowances was planned for (and then completed by) 2011.
5.Rate changes to WDAs on plant and machinery
WDA rates were cut from 25% to 20% for the main pool, and then from 6% to 10% for long-life assets in the new special rate pool. Similar to the AIA, WDA rates have changed several times over the years. From April 2019, the special rate WDA has been at 6%, and since April 2026 the main rate WDA has been at 14%.
6.Classification of “integral features” of a building or structure
This related to new and replacement spending that drew in allowances in the special rate pool.
2012-2014: Selling rule changes
There were a couple of modifications to the rules for selling plant and machinery fixtures in these years – the motivation being that the buyer would usually be unable to claim allowances, unless the seller had pooled the expenditure and both parties had agreed the disposal value. More information on this is under CA26476 within the Capital Allowances Manual.
2016: First-year allowance
In 2016, there was a new FYA introduced for investment related to the provision of plant and machinery for electric vehicle charge points. You can find out about eligibility and other details under CA23156. Philip Hammond, Chancellor at the time emphasised that this measure, alongsideothers , would “build on our competitive advantage in low-emission vehicles and the development of connected autonomous vehicles”.
2018: Structures and buildings allowances (“SBA”)
Under CA90000, a structures and buildings allowance was put in place for organisations spending on constructing and acquiring new non-residential buildings
SBAs were introduced to provide tax deduction for expenditure incurred on certain assets that would not previously have qualified for capital allowances, with relief currently given at 3% per annum on a straight-line basis. You can claim on construction costs, which include fees for design, site preparation, construction works, renovation/repair/conversion costs and fitting out works.
2021: Super-deduction and other pandemic changes
These were temporary revisions introduced during COVID-19 to stimulate business investment. Introducing a 130% super-deduction (“SD”) capital allowance for companies investing in eligible new plant and machinery assets, alongside a 50% FYA for special rate assets..
2023: Super-deduction end and introduction of full expensing
As the world finally started to feel “normal” again, the government decided it was time for the end of the super deduction and so they substituted it with full expensing (“FE”). This would give companies the opportunity to deduct 100% of expenditure on qualifying main pool assets, with a 50% FYA for special rate assets on top of this. Although this was originally a three-year measure, it’s now “permanent” with then-Chancellor Jeremy Hunt dubbing it the “largest business tax cut in modern British history”.
2026: FYA and WDA changes
Capital allowances experienced further amendments with the introduction of a new permanent 40% FYA for qualifying main-rate expenditure. Unlike full expensing, this broadened access to relief by making FYAs available to unincorporated businesses and to assets bought for leasing, both of whihc were previously outside the scope of FYAs.. The WDA for main pool expenditure was also cut from 18% to 14%. The then-Chancellor Rachel Reeves commented at the time: “We are building on the UK’s Capital Allowance regime – one of the most generous in the world – alongside capping Corporation Tax and enabling more scale ups to attract investment to help create a tax system that supports growth”.
Get the most out of capital allowances with Leyton
Given the history of capital allowances, we’re confident that legislation is guaranteed to keep evolving over time, to encourage businesses to keep investing in response to whatever economic challenges the future may bring. But with such frequent changes, it can be difficult to know whether you’re making the most of the relief available.
That’s why we’ve created The essential guide to optimising your capital allowances claim: 2026 edition. It has been written to give you and your business a strong understanding of the current tax relief currently available, helping you make more of your investments in areas such as plant and machinery and commercial property. It can also help you identify opportunities from historic expenditure that may still qualify for relief (although, perhaps not as far back as 1878!).
Look out for our upcoming guide to discover how you can optimise your capital allowances claim.