TL;DR
Plant and machinery depreciates for both accounting (useful economic life) and tax (capital allowances) purposes in the UK. Accounting depreciation is not tax deductible -- it must be added back in the tax computation. Capital allowances under the Capital Allowances Act 2001 give the actual tax deduction. AIA of up to £1 million gives 100% first-year relief. WDA at 18% (main pool) or 6% (special rate pool) applies thereafter.
Last reviewed: June 2026 | Sources: FCA Register, FLA, HMRC, legislation.gov.uk
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Key Facts AIA limit: £1,000,000 (2026/27)Main pool WDA: 18% per yearSpecial rate WDA: 6% per yearSuper-deduction: Ended April 2023 |
Accounting depreciation vs tax capital allowances
UK businesses must keep two distinct depreciation calculations separate. Accounting depreciation reduces the book value of an asset in the company's accounts over its useful economic life under FRS 102 or IFRS. The depreciation charge appears in the profit and loss account and reduces reported profit. However, accounting depreciation is not deductible for tax purposes -- it must be added back in the tax computation.
Tax relief on plant and machinery is given through capital allowances, calculated under the Capital Allowances Act 2001. Capital allowances are determined by asset category and HMRC policy rather than the asset's actual useful life. The two calculations run in parallel.
Annual Investment Allowance
AIA provides 100 percent first-year relief on qualifying plant and machinery up to £1 million per year. For most SMEs, AIA eliminates the difference between accounting and tax depreciation in the year of purchase. AIA applies to both new and used qualifying plant and machinery. It does not apply to cars, structures, land or assets acquired for leasing. Where annual expenditure exceeds £1 million, the excess enters the capital allowance pool and attracts WDA in subsequent years. For business groups, the £1 million AIA limit is shared across all group companies.
Writing Down Allowances
Where AIA is not available or expenditure exceeds the limit, WDA applies at 18 percent per year on a reducing balance basis for the main pool, or 6 percent for the special rate pool. The reducing balance method means the allowance diminishes each year but never reaches zero. A small pools election allows businesses to write off the entire pool balance in one year when it falls below £1,000.
Special rate pool assets (6% WDA)
Certain assets attract only 6 percent WDA: integral features of buildings (electrical systems, cold water systems, heating and ventilation, lifts, escalators), long-life assets (expected useful life of 25 years or more when new), solar panels, and thermal insulation of existing buildings. AIA can be claimed on special rate pool assets in the year of purchase, but WDA is restricted to 6 percent thereafter.
Plant and Machinery: Accounting vs Tax Treatment
| Factor | Accounting Depreciation | Tax Capital Allowances |
|---|---|---|
| Basis | Useful economic life | Statutory rules (CAA 2001) |
| Rate | Set by management | 18% WDA, 6% SR, or 100% AIA |
| Year 1 relief | Proportion of cost | Up to 100% via AIA |
| Cars | Straight line over life | CO2-based rates |
| AIA available | N/A | Yes -- up to £1m qualifying plant |
| Deductible for tax | No -- add back | Yes -- capital allowances are deductible |
| Regulatory basis | FRS 102 / IFRS | Capital Allowances Act 2001 |
Source: HMRC Capital Allowances Manual, FRS 102 Section 17.
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Disclaimer This guide is for information only and does not constitute financial advice. Asset finance products vary by lender and business circumstances. Always verify lender details on the FCA Financial Services Register at register.fca.org.uk before applying. Kael Tripton Ltd is an independent editorial publisher and is not regulated by the FCA. |
Frequently asked questions
Is accounting depreciation tax deductible?
No. Accounting depreciation is not deductible for corporation tax or income tax. It must be added back in the tax computation. The equivalent tax deduction is capital allowances, calculated under the Capital Allowances Act 2001.
What is the AIA limit for 2026/27?
The Annual Investment Allowance is £1 million per year for 2026/27, made permanent at this level since January 2023. Qualifying plant and machinery purchases up to £1 million can be written off 100 percent in the year of purchase.
What is the super-deduction and has it ended?
The super-deduction (130 percent first-year allowance for new qualifying plant) ran from April 2021 to March 2023. It ended when the main corporation tax rate increased to 25 percent. It has not been reinstated. The current regime uses AIA at 100 percent and 50 percent first-year allowance for special rate assets purchased by companies.
Do AIA and WDA both apply to the same asset?
No. Once AIA is claimed on an asset, it has been fully written off for tax purposes and WDA does not apply. WDA applies to assets in the pool -- assets on which AIA has not been claimed, either because the AIA limit was exceeded or the asset is excluded from AIA such as a car.
How does hire purchase affect plant depreciation?
Under hire purchase, the business is treated for tax as if it purchased the asset outright on the commencement date. Capital allowances including AIA can therefore be claimed in the year the agreement starts, not when legal ownership transfers at the end of term. This gives an earlier tax deduction than waiting for ownership.
What are typical useful economic lives for common plant?
Common accounting useful economic lives: commercial vehicles five to seven years; agricultural machinery seven to ten years; manufacturing plant ten to fifteen years; office equipment and IT three to five years; fixtures and fittings five to ten years. These accounting rates do not affect the tax capital allowance calculation, which follows statutory rates regardless of accounting policy.
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Sources Capital Allowances Act 2001 |
