Taxation (UK) · Taxable total profits

Adjusted Trading Profit and Capital Allowances for Companies

Updated 11 October 2026 · Fact-checked

Adjusted trading profit starts with the accounting profit. You add back disallowable expenses and capital items, deduct income taxed elsewhere or not taxable, then deduct capital allowances. Companies get AIA, a 100% or 50% first year allowance, or 18% or 6% writing down allowances. The result is the tax-adjusted trading profit.

Understand Adjusted Trading Profit and Capital Allowances

A company's accounts follow IFRS. Tax follows its own rules. So the profit in the accounts is not the profit that is taxed. You must adjust it to reach the tax-adjusted trading profit.

The adjustment has three parts. First, add back expenses the accounts deducted but tax does not allow. Examples are depreciation, customer entertaining, fines, and capital expenditure. Second, deduct income that is in the accounts but not taxed as trading income. Examples are profits on disposal of assets and interest received. Interest received is taxed separately as a non-trading loan relationship. Third, replace depreciation with capital allowances, which are the tax relief for spending on plant and machinery.

For a company, there is no private use adjustment. If a director uses a company asset privately, the benefit is taxed on the director, not the company. Staff entertaining and staff gifts are allowable. Qualifying charitable donations are not a trading expense. You add them back and deduct them later from total profits.

Capital allowances are worked out in pools. Most plant goes into the main pool at 18% a year on the reducing balance. Cars with CO2 emissions over 50 grams per kilometre, and some other items, go into the special rate pool at 6%. The annual investment allowance (AIA) gives 100% relief on up to £1,000,000 of qualifying spending a year. Companies can also claim a first year allowance (FYA): 100% on main pool additions and 50% on special rate pool additions. Cars never qualify for AIA.

The capital allowances are deducted from the adjusted profit. If they exceed the profit, the result is a trading loss.

Key rules to remember

Tax-adjusted trading profit: Profit per accounts + disallowable expenses − non-trading or non-taxable income − capital allowances; Do the add-backs and deductions first, then deduct capital allowances. Show a row for each item.
Main pool writing down allowance: WDA = 18% × (tax written down value b/f + additions not covered by AIA or FYA − disposal proceeds); Reducing balance basis. Disposal proceeds are capped at original cost. Multiply by months ÷ 12 if the accounting period is not 12 months.
Special rate pool writing down allowance: WDA = 6% × (tax written down value b/f + additions not covered by AIA or FYA − disposal proceeds); Used for cars with CO2 emissions over 50 g/km and other special rate items. Time-apportion for short periods.
Annual investment allowance: AIA = 100% × qualifying spending, up to £1,000,000 per 12-month period; Not available on cars. Reduce the limit pro rata for a short period. In the final period of trade no WDA or FYA is given (a balancing adjustment applies instead), but the AIA can still be claimed.
First year allowance for companies: FYA = 100% on main pool additions; 50% on special rate pool additions; Cars with zero CO2 emissions bought new get 100%. Not available in the final period of trade. Additions that receive FYA do not enter the pool for WDA.
Car allowance rates: New zero emission: 100%; CO2 1 to 50 g/km: 18% (main pool); over 50 g/km: 6% (special rate pool); Second-hand zero emission cars get 18%.
Structures and buildings allowance: SBA = 3% × qualifying construction cost, straight line; Applies to qualifying non-residential structures and buildings. It is not part of the pools.
Rounding and apportionment rules: Work to the nearest £. Apportion to the nearest month.; These are the supplementary instructions printed in the exam.

How to solve Adjusted Trading Profit and Capital Allowances questions

Use the same layout for every adjustment of profits question. It keeps your workings clear and earns marks even if one number is wrong.

1Write the profit per accounts as the first line, then list every expense or income item in the question in a table with the headings: add back, deduct, no adjustment.
2Go through each expense. Add back depreciation, amortisation, customer entertaining, fines, capital costs, general provisions, donations to charities and political donations. Leave allowable items alone, such as staff entertaining and trade debts written off.
3Deduct income that is not trading income, such as profit on disposal of assets and interest received. Show these amounts separately for the later corporation tax computation.
4Reach the adjusted profit before capital allowances. State the length of the accounting period, because it affects AIA and WDA.
5Build the capital allowance computation with columns for AIA or FYA, main pool, special rate pool and total allowances. Start with the written down value brought forward, then add additions and deduct disposals.
6Allocate AIA to the special rate pool additions first, because they earn the lowest WDA (6%), then to main pool additions. A company may claim a 100% FYA on main pool plant instead of AIA. Do not claim FYA on spending that has already received AIA. Any excess over the AIA limit goes into the pool, or gets a 50% FYA if it is special rate pool plant and you claim it. Remember that cars cannot get AIA.
7Calculate the WDA on the pool balance after additions and disposals. Check for a balance of £1,000 or less, which can be written off in full. Add up all the allowances.
8Deduct the total capital allowances from the adjusted profit to give the tax-adjusted trading profit. Label it clearly.

Quickest way: Three-column scan for adjustments

When to use it: Use this in objective test questions and in Section C when time is short and the list of items is long.

Tick each item as A (add back), D (deduct) or N (no change) as you read it. Do this before you calculate anything.
Add all the A items and subtract all the D items in one calculation. Do not adjust one item at a time.
For capital allowances, deal with AIA and FYA first, since they are 100% and need no pool calculation. Then do the WDA on what remains in the pools.
Check cars last. Note the CO2 figure and decide: main pool, special rate pool, or 100% FYA if new and zero emission.
Do a sanity check. Depreciation should always be added back and capital allowances should always reduce profit.

Common mistakes in Adjusted Trading Profit and Capital Allowances

Adding back all entertaining.
Students remember that entertaining is disallowable and apply it to every case.
Fix: Only customer and supplier entertaining is disallowable. Staff entertaining is allowable, and so are gifts to staff.
Claiming AIA on a car.
Cars look like plant, and AIA is usually the first thing students think of.
Fix: Cars never qualify for AIA. Put them in the main pool or special rate pool, or give a new zero emission car a 100% FYA.
Forgetting to time-apportion for a short period, or to split a long one.
Students focus on the pool and miss the accounting period length in the question.
Fix: Write the period length at the top of your answer. Multiply the AIA limit and WDAs by months ÷ 12 only for a period shorter than 12 months. A period longer than 12 months is split into a 12-month period and a remainder, and the allowances are calculated separately for each.
Deducting interest received or a gain on disposal in the wrong place, or not at all.
The accounts show these within profit, so they look like trading items.
Fix: Deduct them from the trading profit. Interest goes to non-trading loan relationships. A profit on disposal of an asset is deducted from trading profit. Plant disposal proceeds go into the capital allowance pool. A chargeable gain arises only for chargeable assets such as land and buildings.
Taking WDA on assets that received AIA or FYA in the same period.
Students add all additions to the pool before they claim anything.
Fix: Additions that get AIA or a 100% FYA do not go into the pool for WDA. Only the remaining balance in the pool earns WDA.
Adding back qualifying charitable donations and then deducting them again in the trading computation.
Students mix up the trading computation with the corporation tax computation.
Fix: Add the donation back in the adjustment of profits. Deduct it only as a charge on total profits.

Worked examples

Example 1

Brook Ltd prepares accounts for the year ended 31 March 2026. The profit per accounts is £312,000. This is after charging depreciation of £24,000, customer entertaining of £3,500, staff entertaining of £2,000, a donation to a registered charity of £1,500, and legal fees of £4,000 on buying a freehold factory. It is also after crediting bank interest received of £6,000 and a profit on sale of machinery of £5,000. Capital allowances are £40,000. Calculate the tax-adjusted trading profit.

Show the solution

Start with the profit per accounts: £312,000.
Add back depreciation: £24,000. Depreciation is never allowable.
Add back customer entertaining: £3,500. Staff entertaining of £2,000 is allowable, so make no adjustment.
Add back the charitable donation: £1,500. It is deducted later from total profits, not from trading profit.
Add back the legal fees on the factory purchase: £4,000. They are capital.
Total add-backs: 24,000 + 3,500 + 1,500 + 4,000 = £33,000. Profit is now 312,000 + 33,000 = £345,000.
Deduct bank interest of £6,000. It is taxed as non-trading loan relationship income.
Deduct the profit on sale of machinery of £5,000. It is a capital profit, not taxed as trading income. The sale proceeds are dealt with in the capital allowances pool.
Adjusted profit before capital allowances: 345,000 − 6,000 − 5,000 = £334,000.
Deduct capital allowances of £40,000: 334,000 − 40,000 = £294,000.

Answer: The tax-adjusted trading profit is £294,000.

Example 2

Cobalt Ltd has a 12-month accounting period ended 31 March 2026. At 1 April 2025 the main pool tax written down value was £40,000. In the year it bought plant for £60,000, a car with CO2 emissions of 120 g/km for £18,000, and a new electric car with zero CO2 emissions for £30,000. It sold old machinery for £7,000, which is less than the original cost. Calculate the total capital allowances. The annual investment allowance limit has not been used by any other spending.

Show the solution

The period is 12 months, so there is no time apportionment. The AIA limit is £1,000,000.
Plant of £60,000 qualifies for AIA at 100%. AIA = £60,000. It does not enter the main pool.
The new zero emission electric car of £30,000 gets a 100% FYA = £30,000. Cars cannot claim AIA, and this car does not enter the pool.
The car with emissions of 120 g/km goes to the special rate pool. It cannot claim AIA. No FYA is claimed here, so the full £18,000 sits in the pool.
Special rate pool WDA: 18,000 × 6% = £1,080. Written down value carried forward: 18,000 − 1,080 = £16,920.
Main pool: balance brought forward £40,000, less disposal proceeds £7,000 = £33,000.
Main pool WDA: 33,000 × 18% = £5,940. Written down value carried forward: 33,000 − 5,940 = £27,060.
Total allowances: 60,000 + 30,000 + 5,940 + 1,080 = £97,020.

Answer: The total capital allowances are £97,020.

Exam tips

Lay out the capital allowance computation in columns for AIA, FYA, main pool, special rate pool and total. Markers award marks for each pool and each allowance separately.
Always show an item you treat as no adjustment, with a zero or a tick. This earns marks and shows the marker that you have considered it.
Check the CO2 figure on every car. It decides which pool the car goes in, and whether a new car gets a 100% FYA.
In objective test questions, a 'which is disallowable' question is all or nothing. Read every option and watch the customer versus staff distinction.
Remember that the exam rates and limits are printed in the tax tables. Use the £1,000,000 AIA limit and the 18% and 6% rates given there, and round to the nearest £.

Practice questions from Taxable total profits

Adjusted Trading Profit and Capital Allowances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalTrading Profits and Capital Allowances for Companies

Adjusted Trading Profit and Capital Allowances: frequently asked questions

What expenses are disallowable for a company in TX-UK?

The main ones are depreciation and amortisation, customer entertaining, fines and penalties, capital expenditure, general provisions, and political donations. Donations to charities are also added back, then relieved against total profits. Staff entertaining and trade bad debts are allowable.

What is the difference between AIA and FYA?

AIA gives 100% relief on up to £1,000,000 of qualifying spending a year and is available to any business. FYA is available to companies only. It gives 100% on main pool additions and 50% on special rate pool additions. Cars cannot get AIA.

Do I deduct capital allowances before or after adding back depreciation?

Add back depreciation first as part of the adjustments. Then deduct capital allowances from the adjusted profit. Depreciation is replaced by capital allowances as the tax relief for the cost of assets.

What happens if the accounting period is not 12 months?

Multiply the AIA limit and the WDA by the number of months divided by 12 only if the period is shorter than 12 months. A period of 12 months or less is one chargeable accounting period. A period of more than 12 months is split into a 12-month period and a second shorter period, and the allowances are worked out for each separately.

How are cars treated in the capital allowance computation?

A new zero emission car gets a 100% FYA. A car with CO2 emissions of 1 to 50 g/km goes in the main pool at 18%. A car with emissions over 50 g/km goes in the special rate pool at 6%. No car qualifies for AIA.