Capital Allowances: The General Pool, How the Calculation Works, and What Hire Purchase Changes

From qualifying expenditure to your actual tax deduction: the mechanics of the writing down allowance system.

Buying a piece of equipment does not immediately reduce your tax bill by the full purchase price. Instead, UK tax law gives businesses a deduction on capital spending through an annual calculation called the writing down allowance (WDA). How that deduction is calculated, how assets moving in and out affect it, and how hire purchase changes the picture: those are the basic mechanics this article covers.

The starting point is the general pool. Most plant and machinery that qualifies for capital allowances ends up in this pool. A writing down allowance is applied to the pool balance each accounting period on a reducing balance basis. The pool balance then carries forward. Understanding the structure of that calculation is the foundation for everything else in the capital allowances system.

The General Pool: One Calculation for All Qualifying Assets

Rather than maintaining a separate calculation for every piece of plant and machinery a business owns, the Capital Allowances Act 2001 (CAA 2001) uses a pooling system. All qualifying plant and machinery expenditure goes into a single general pool, and one calculation is prepared for the pool each accounting period.

The allowance is a fixed percentage of the pool balance, calculated on a reducing balance basis. This means the percentage is applied to whatever is left in the pool after previous years’ allowances have been deducted. For the accounting periods covered by the examples in this article, the rate is 18%.

Rate update: From 1 April 2026 (corporation tax) and 6 April 2026 (income tax self-assessment), the main rate WDA reduced from 18% to 14%. The examples in this article use 18%, which was the correct rate for the periods shown. For accounting periods ending after those dates, apply 14% to the general pool.

The residual balance after deducting the allowance is called the tax written down value (TWDV). It carries forward as the opening balance for the next period, where the same process runs again.

A Worked Example: Rachel’s Physiotherapy Clinic

Rachel runs a sole trader physiotherapy clinic. Her tax written down value at the start of the year ended 31 March 2025 was £16,800, representing existing equipment already in the pool.

During the year she purchased a new treatment table for £2,400 and an ultrasound therapy machine for £4,700. She also sold her old electrotherapy unit, which she had been using in the business, for £300.

Rachel claims £4,248 as a deduction in arriving at her taxable trading profit for the year ended 31 March 2025. Her pool carries forward at £19,352, which becomes the opening balance for the following year.

Notice how the WDA falls in absolute terms as the pool value changes. Year one gave £4,248. Year two gives £3,816. This is the reducing balance effect: each year the relief shrinks slightly, which is why the Annual Investment Allowance (covered in Subject 09) is so valuable for businesses with significant capital expenditure. The full cost is claimed in year one rather than trickling through over many years.

Additions: What Goes Into the Pool and at What Value

Any new qualifying plant and machinery brought into the business during the accounting period is added to the pool at cost. Three specific situations require a different value.

Value Added Tax (VAT) and the addition

Value Added Tax (VAT) is a tax charged on most goods and services in the UK. Its treatment in the capital allowances computation depends on whether the business is VAT registered.

A VAT-registered business can reclaim VAT on most business purchases from HMRC. The addition goes into the pool at the VAT-exclusive cost, because the VAT is not a real cost to the business.

A business that is not VAT registered cannot reclaim the VAT. The addition goes in at the full VAT-inclusive cost, because every pound of VAT paid is genuinely part of the cost of acquiring the asset.

There is an exception that applies regardless of VAT registration: VAT on cars that have any element of private use cannot be reclaimed, even by VAT-registered businesses. Cars with any private use therefore always go into the pool at the VAT-inclusive price.

Assets originally bought for private use

Where a trader originally bought an asset for personal use and subsequently brings it into the business, the value entering the pool is the market value of the asset at the date it starts being used in the trade. The original purchase price is not relevant. The legislation is at section 13 CAA 2001.

Gifted assets

Where plant and machinery is gifted to a trader, market value at the date of the gift is used as the addition value, under section 14 CAA 2001.

Disposals: What Comes Out and at What Value

When a business sells or stops using qualifying plant or machinery, the disposal must be taken out of the capital allowances computation. The disposal value is deducted from the pool, and the WDA is calculated on the remaining balance.

The disposal value is normally the sale proceeds actually received. However, there are three situations where market value is used instead of actual proceeds:

Market value applies where: (1) the asset is sold below market value, such as a sale to a connected person; (2) the asset is given away rather than sold; or (3) the asset is retained by the trader for personal use after ceasing to be used in the trade.

There is also an important ceiling. If the sale proceeds, or the market value where relevant, exceed the original cost of the asset, the disposal value is capped at the original cost. You cannot bring in more than you originally paid in. The authority for this is section 62 CAA 2001.

Why does this cap matter? If you buy an asset for £5,000 and later sell it for £8,000, the cap means the disposal value is £5,000, not £8,000. The profit on sale is dealt with separately as a chargeable gain, not through the capital allowances pool.

Short and Long Accounting Periods

The WDA rate is designed for a standard 12-month accounting period. Where the accounting period is shorter or longer than 12 months, the rate must be adjusted proportionately.

A shorter period arises when a business first starts trading and draws up its first accounts for less than a full year. It also arises when a business changes its accounting date, which can produce one short period during the transition.

For a nine-month accounting period: WDA = 18% x 9/12 = 13.5% (using pre-April 2026 rate). For the current 14% rate: WDA = 14% x 9/12 = 10.5%. The same proportioning logic applies to the Annual Investment Allowance limit.

Hire Purchase: Capital Allowances on What You Actually Pay for the Asset

A hire purchase (HP) agreement is a finance arrangement where a business acquires an asset and pays for it in instalments over time. Legal ownership transfers to the buyer only when the final instalment is paid. That would suggest capital allowances cannot be claimed until ownership transfers. Tax law says otherwise.

Under section 67 CAA 2001, the buyer is treated as owning the asset from the moment the HP contract begins. Capital allowances are therefore available from the date the asset is brought into use, regardless of when the payments are made or when legal title formally passes.

Capital allowances are claimed on the capital cost of the asset: this is the cash price, not the total of all HP instalments. The total of instalments exceeds the cash price because it includes a finance charge. That finance charge, which is the cost of borrowing spread over the HP term, is deductible separately as a trading expense in the income statement (the profit and loss account), not through the capital allowances pool.

One further point on HP: the four-month rule (which governs when expenditure incurred shortly before an accounting period is treated as falling in that period) does not apply to HP agreements. Expenditure on an asset acquired under HP is treated as incurred when the asset is brought into use. Section 67 CAA 2001.

Leasing: No Capital Allowances, Relief Through the Income Statement

Where a business hires or borrows an asset under a leasing arrangement, capital allowances are not available. The business does not own the asset, and ownership is the foundation of the capital allowances system.

Relief for leasing costs is given through the income statement instead. Lease rentals charged to the income statement are an allowable deduction from trading profits, subject to the rules on high-emission cars covered in the subject on adjusting trading profit.

Claiming and Disclaiming: Capital Allowances Are a Choice

Capital allowances are not applied automatically. They must be actively claimed within the trader’s self-assessment return. A claim can be made or amended at any time until the deadline for amending the relevant return. For a 2024/25 tax return, that deadline is 31 January 2027.

There is also no requirement to claim the full amount available. A trader can disclaim some or all of the capital allowances due for a period.

Disclaiming is sometimes sensible. If a trader’s profits for the year are already below their personal allowance (the amount of income that is free of income tax), there is no income tax to offset. Claiming capital allowances would produce no tax saving in that year. By disclaiming, the trader preserves a higher tax written down value in the pool, which produces higher WDA claims in future years when profits are higher and the relief is actually worth something.

What Comes Next in This Series

This article covers the mechanics of the general pool: how additions and disposals flow through, how the WDA is calculated, and how HP and leasing are treated differently. The next article in this series covers the Annual Investment Allowance, First-Year Allowances, the special rate pool, and the rules that apply when qualifying fixtures are included in a property sale.

Getting the pool calculation right each year matters, not just for the current year’s tax return, but because the tax written down value carried forward directly determines future relief. An error in the pool today compounds over every subsequent period until the pool is eventually wound down.

Want to make sure your capital allowances are calculated correctly?

Zazentax works with sole traders, partnerships, and limited companies across the UK. Contact us at zazentax.com/contact

This article is for general information only. Tax rules change and individual circumstances vary. Consult a qualified tax professional before making decisions based on any information here.

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