Advanced Taxation (UK) · Corporation tax: the scope of corporation tax, including close companies and investment companies

Trading Profits and Capital Allowances for Companies

Updated 11 October 2026 · Fact-checked

A company's taxable trading profit is its accounting profit adjusted for disallowable items and non-trade income, less capital allowances. Allowances come from pooled plant and machinery (18% main pool, 6% special rate pool), the annual investment allowance, enhanced first-year allowances for companies, and the 3% structures and buildings allowance.

Understand Trading Profits and Capital Allowances for Companies

A company pays corporation tax on its taxable total profits. For most companies the biggest part is the trading profit. You do not start with the accounting profit and tax it as it stands. You adjust it first.

The adjustment has three parts. Add back expenses that the tax rules do not allow, such as depreciation, customer entertaining, capital spending and fines. Remove income that is taxed elsewhere, such as interest received and profits on selling assets. Then deduct capital allowances, which replace accounting depreciation with tax relief set by statute.

Plant and machinery allowances work through pools. Most items go into the main pool. Integral features, long-life assets and cars with high CO2 emissions go into the special rate pool. Each pool gets a writing down allowance (WDA) on a reducing balance: 18% for the main pool and 6% for the special rate pool. Disposal proceeds are deducted from the pool.

There are faster reliefs on top of the pools. The annual investment allowance (AIA) gives 100% relief on qualifying spending up to £1,000,000. Companies can also claim enhanced first-year allowances. In the main pool this is a 100% first-year allowance, often called full expensing. In the special rate pool it is a 50% first-year allowance. Cars are treated separately, and new zero-emission cars get 100%.

Buildings are different. The structures and buildings allowance (SBA) gives a 3% straight-line allowance on the cost of qualifying non-residential structures. It does not apply to the land. Always ask what the asset is before you choose the relief.

Key rules to remember

Adjusted trading profit: Accounting profit + disallowable expenses − non-trade income and capital profits − capital allowances (+ balancing charges); Capital allowances are deducted last. Balancing charges are added.
Writing down allowance rates: Main pool 18%; special rate pool 6%; Applied to the pool balance after additions without first-year allowances and after disposals. Reducing balance method.
Annual investment allowance: 100% on qualifying spend up to £1,000,000 per period; Not available on cars. Reduce the limit for short periods and share it between associated companies as the rules require.
Enhanced allowances for companies: Main pool first-year allowance 100% (full expensing); special rate pool first-year allowance 50%; For new qualifying plant. Cars are excluded from these. Check the asset is new and not leased out.
Cars: New zero-emission car 100%; second-hand zero-emission 18%; CO2 1 to 50 g/km 18%; over 50 g/km 6%; The allowance given is a writing down rate that places the car in a pool, except the 100% for new zero-emission cars.
Structures and buildings allowance: Annual allowance = 3% × qualifying cost (straight line); Time-apportion for periods that are not 12 months. Land and residential property do not qualify.
Short or long accounting period: WDA = rate × months ÷ 12; Also reduce the AIA limit by months ÷ 12.
Pool balance carried forward: TWDV b/f + additions (without FYA) − disposal proceeds (capped at cost) − WDA = TWDV c/f; A negative balance after disposals gives a balancing charge.

How to solve Trading Profits and Capital Allowances for Companies questions

Use the same order every time. It keeps the working tidy and helps the marker give you follow-through marks.

1Read the scenario. Note the accounting period length, the start of any new trade, and whether the company is associated with others.
2Adjust the accounting profit. Add back depreciation, disallowable items and capital items. Deduct interest received and capital profits. Show a one-line reason for each item.
3List every asset bought and sold. Classify each as main pool, special rate pool, car, or building.
4Decide the relief for each addition. Use AIA first on special rate items where it saves most. Use full expensing or the 50% allowance for the rest if the asset qualifies. Use pool WDA otherwise.
5Compute each pool: balance b/f, additions, disposals, WDA at the correct rate and time-apportioned if needed. Show the balance c/f.
6Add any SBA at 3% on qualifying cost, time-apportioned.
7Total the allowances and deduct them from adjusted profit. If a balancing charge arises, add it instead.
8State the final trading profit. Add a short comment if the question asks for advice or timing.

Quickest way: Pool-by-pool grid

When to use it: Use when the question lists many purchases and you have limited time. It works best for questions with one or two pools.

Draw columns: Main pool, Special rate pool, AIA/FYA claims, Total allowances.
Place each addition in its column first. Put the AIA claim against special rate items first, up to £1,000,000.
Put new qualifying main pool plant into the full expensing claim and cars into the pool they belong to.
Do the WDA only on the opening balance after disposals, plus any additions that did not get a first-year allowance.
Add across the Total allowances column. Then subtract from adjusted profit.

Common mistakes in Trading Profits and Capital Allowances for Companies

Claiming AIA or full expensing on a car
Students see 'plant' and forget cars are treated separately.
Fix: Put cars in the pool at 18% or 6% according to CO2, unless it is a new zero-emission car, which gets 100%.
Adding back depreciation but forgetting to deduct the profit on sale of assets
Students stop once the expenses are adjusted.
Fix: Scan the accounts for any gain on disposals and for interest received. Remove both from trading profit.
Applying WDA to additions that already received a 100% first-year allowance
Students put every addition into the pool balance.
Fix: Only the part not relieved by AIA or a first-year allowance enters the pool for WDA.
Ignoring a short accounting period
The 18% and 6% rates feel fixed.
Fix: Multiply the WDA rate and the AIA limit by months ÷ 12 whenever the period is not 12 months.
Treating all customer and staff entertaining the same
Both are called entertaining.
Fix: Customer entertaining is disallowed. Staff entertaining is normally allowed, so add back only the customer part.
Giving SBA on the land cost or on a residential building
Students apply 3% to the whole purchase price.
Fix: Use only the qualifying construction cost of a non-residential structure. Exclude land.

Worked examples

Example 1

Alpha Ltd prepares accounts for the 12 months to 31 March 2026. At 1 April 2025 the main pool tax written down value was £40,000 and the special rate pool was £30,000. During the year Alpha bought new plant for £1,300,000 (main pool), an integral feature for £80,000, and a new car with CO2 emissions of 130 g/km for £25,000. There were no disposals. Alpha claims the maximum allowances. Compute the total capital allowances.

Show the solution

Integral feature £80,000 goes into the special rate pool. The AIA of 100% is available up to £1,000,000, so claim AIA of £80,000. This is outside the pool.
New plant £1,300,000 qualifies for the 100% first-year allowance (full expensing) in the main pool. Allowance = £1,300,000.
Main pool WDA: 18% × £40,000 = £7,200. The additions with first-year allowance do not get WDA. TWDV c/f = £32,800.
The car has CO2 over 50 g/km, so it enters the special rate pool at £25,000. It cannot use AIA or the enhanced allowance.
Special rate pool: £30,000 + £25,000 = £55,000. WDA 6% × £55,000 = £3,300. TWDV c/f = £51,700.
Total allowances = £80,000 + £1,300,000 + £7,200 + £3,300 = £1,390,500.

Answer: Total capital allowances are £1,390,500. The main pool carries forward £32,800 and the special rate pool £51,700.

Example 2

Beta Ltd prepares accounts for the 9 months to 31 March 2026. The profit per accounts is £310,000 after charging depreciation £28,000, customer entertaining £6,000, staff party £4,000 and debt-collection legal fees £3,000. The accounts include interest receivable £5,000 and a profit on sale of a machine £12,000. The main pool TWDV at the start of the period was £60,000. Beta bought plant for £70,000 and sold a machine for £20,000 (cost £35,000). Compute the trading profit.

Show the solution

Adjust profit: £310,000 + depreciation £28,000 + customer entertaining £6,000 = £344,000.
Staff party and debt-collection legal fees are allowable, so leave them. Deduct interest £5,000 and profit on sale £12,000. Adjusted profit before allowances = £344,000 − £17,000 = £327,000.
AIA limit for 9 months = £1,000,000 × 9/12 = £750,000. The £70,000 plant is fully covered, so AIA = £70,000.
Main pool: £60,000 − disposal proceeds £20,000 = £40,000. The proceeds are below cost, so no cap applies.
WDA = 18% × 9/12 × £40,000 = 13.5% × £40,000 = £5,400. TWDV c/f = £34,600.
Total allowances = £70,000 + £5,400 = £75,400.
Trading profit = £327,000 − £75,400 = £251,600.

Answer: Beta Ltd's trading profit for the 9-month period is £251,600.

Exam tips

Show the adjustment of profit as a list with a reason beside each item. Markers give marks for each correct treatment, including 'no adjustment'.
Always check the length of the accounting period first. Short periods change both the WDA and the AIA limit.
If the question asks which relief to claim, compare AIA, full expensing and the 50% allowance. Say which asset each applies to and why.
Cars are a favourite trap. Check the CO2 figure and whether the car is new or second-hand before you choose a rate.
For professional skills marks, add a short note on timing. For example, you may say a claim reduces profit now and can affect loss relief or marginal relief.

Practice questions from Corporation tax: the scope of corporation tax, including close companies and investment companies

Trading Profits and Capital Allowances for Companies in other exams

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

ACCA Applied SkillsAdjusted Trading Profit and Capital Allowances

Trading Profits and Capital Allowances for Companies: frequently asked questions

What is the difference between AIA and full expensing?

AIA gives 100% relief on qualifying spend up to £1,000,000 and can apply to main pool and special rate assets. Full expensing is the 100% first-year allowance for companies on new main pool plant, and it has no £1,000,000 cap. Cars are outside both, except that new zero-emission cars get 100%.

How do I calculate the writing down allowance on the main pool and special rate pool?

Take the opening pool balance, add any additions that did not get a first-year allowance, and deduct disposal proceeds. Multiply the result by 18% for the main pool or 6% for the special rate pool. Time-apportion the rate for a period that is not 12 months.

What does the structures and buildings allowance cover?

It gives a straight-line allowance of 3% a year on the cost of qualifying non-residential structures and buildings. Land does not qualify. You time-apportion it for periods that are not 12 months.

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

After. First adjust the accounting profit, including adding back depreciation. Then deduct capital allowances to reach the taxable trading profit.