Asset finance and capital allowances: who claims and when

The way you finance an asset changes who gets the tax relief, how much and in which year. This guide explains the mechanics for UK business owners weighing up hire purchase, leasing or refinancing, so you can have a sharper conversation with your accountant before you sign. Smart Funding Solutions is a broker, not a lender or a tax adviser: we arrange asset finance from lenders on our panel of 300+, from around £10,000 to £500,000+, with larger facilities available in suitable cases, and the options are set out on our asset finance hub. Tax rules change and depend on your circumstances, so confirm your position with an accountant.

01The short version by finance type

Finance type	Who claims capital allowances	What you deduct
Outright purchase or business loan	You	Capital allowances on the asset; loan interest as a finance cost
Hire purchase	You, on the full capital cost once the asset is in use	Capital allowances, plus the interest and charges spread over the agreement
Finance lease (most short and medium leases)	The finance company	Broadly what your accounts charge: depreciation and the finance element
Operating lease or contract hire	The finance company	The rentals, subject to restrictions for some cars
Long funding lease (generally longer terms)	Usually you, as lessee	Capital allowances rather than the full rentals
Refinance or sale and HP back	Usually no fresh claim on kit you already own	The finance charges

The ownership and VAT differences between these structures are covered in our guide to hire purchase vs leasing.

02The allowances that matter for financed assets

Annual Investment Allowance

The Annual Investment Allowance gives 100% relief on qualifying plant and machinery up to £1 million a year. It is available to companies, sole traders and partnerships, covers new and used assets, and excludes cars. For most small and medium businesses, it covers all their equipment spending, which makes it the default relief for second-hand kit.

Full expensing and the 50% special rate allowance

Companies can claim full expensing: 100% relief on new and unused main-rate plant, and a 50% first-year allowance on special rate assets such as some building systems. There is no annual cap. It is not available to sole traders or partnerships, not for used assets and not for assets bought to lease out to others.

The 40% first-year allowance

From 1 January 2026, a 40% first-year allowance applies to new and unused main-rate plant. Unlike full expensing, it can cover assets bought for leasing and is open to unincorporated businesses, which matters for leasing companies and for owners spending above the AIA limit. Cars are excluded.

Writing-down allowances

Anything not relieved upfront goes into a pool and is relieved gradually. The main-rate writing-down allowance was cut from 18% to 14% from April 2026, so relief on pooled spending now arrives more slowly. Cars have their own rules based on CO2 emissions.

03Why hire purchase is tax-efficient

Under a hire purchase agreement, tax law treats the hirer as the owner from the start. Once the asset is brought into use, the whole capital cost is treated as incurred, so you can claim the AIA or full expensing on the full price in that year even though you have only paid the deposit and a few instalments. The interest and fees are a separate revenue deduction, spread over the agreement in line with your accounts.

That timing gap can be valuable. Relief on the full cost in year one, against payments spread over several years, can improve cash flow in the early part of the agreement. The flip side is that the relief has been taken early: later years carry the payments with less relief to set against them.

Anything not relieved upfront goes into a pool and is relieved gradually.

04Worked illustration

Illustration. A profitable company acquires a new main-rate machine costing £100,000 on hire purchase, paying a deposit of £10,000 and the balance over four years. It brings the machine into use in its current accounting period.

• Under full expensing, it can deduct £100,000 from that year's taxable profits. If those profits are taxed at the 25% main rate, the tax bill falls by £25,000 in that year, more than the cash actually paid towards the machine so far.
• The finance charges are deducted separately as they are recognised in the accounts.
• If the same machine were taken on a short operating lease instead, the finance company would claim the allowances, and the company would deduct the rentals year by year. Total relief may be similar over time, but it arrives later.

The numbers are hypothetical. Actual relief depends on your profits, tax rate, accounting period and the asset's classification.

05Leasing, cars and selling the asset

• Leased assets. Because the finance company claims the allowances, the benefit reaches you, if at all, through the rental pricing. Lenders price leases differently, so compare the total cost alongside the tax effect.
• Cars on lease or contract hire. Part of the rental can be disallowed for cars above a set CO2 threshold. Zero-emission cars are treated more favourably.
• Balancing charges. If you claim 100% relief and later sell or part-exchange the asset, the sale proceeds are brought back into tax. Part-exchanging a fully expensed machine can therefore create a taxable charge in the year of sale.
• Refinancing. Raising cash against equipment you own through asset refinance does not normally create a new claim, because you have already had relief on the asset.

06Sole traders and partnerships

Unincorporated businesses cannot use full expensing but can claim the AIA and, from January 2026, the 40% first-year allowance on new main-rate plant. Many smaller sole traders now use the cash basis by default, which treats most equipment purchases differently from the capital allowances rules described here. If you are a sole trader, ask your accountant which basis applies before deciding how to finance an asset. Borrowing of £25,000 or less by sole traders and small partnerships can be regulated consumer credit, which brings additional protections.

07Pros, cons and when tax should not decide it

Tax relief is a reason to time an investment, not a reason to buy equipment you do not need. Common mistakes include buying before the year end to catch relief and then struggling with the payments, choosing hire purchase for kit you will want to hand back in three years, and forgetting the balancing charge when trading in early. A lease that costs less in total can beat a hire purchase agreement with better upfront relief. Sector context matters too: renewable energy equipment often falls into the special rate pool, used equipment misses the first-year allowances, and vehicle fleets have their own car rules. If you are facing a large corporation tax bill as a result of strong trading, see our page on corporation tax loans.

08Who qualifies for asset finance?

Asset finance is generally available to trading businesses that can show the payments are affordable on an asset with a reliable resale value; younger businesses may need a larger deposit or a guarantee. The tax treatment is your accountant's question; the lender is asking whether the asset and the business can carry the agreement. Expect these points:

• The asset itself: how long it lasts, how easily it could be resold and whether it is new or used, which shapes the term offered.
• Affordability: whether profits cover the monthly payments alongside existing finance, judged on accounts and recent bank statements rather than the tax saving.
• The deposit and VAT: on hire purchase the VAT is usually payable upfront, so lenders check you can fund it until it is reclaimed.
• Trading history: younger businesses may be asked for a larger deposit or a director's guarantee.
• The supplier: lenders check the supplier is genuine and the invoice matches the asset being financed.

09How long asset finance takes, and why it matters before your year end

Standard asset finance typically takes from a few days to two weeks from application to payout, but for tax purposes the date that counts is when the asset is brought into use, not when the finance is approved. Hire purchase relief is only available for the accounting period in which the asset is in use, so an agreement signed in the last week of the year with a machine still on a lorry may push the claim into the next year. Common delays are supplier lead times, especially for plant and machinery built to order or imported, lender checks on used kit and private sellers, and getting VAT invoices that match the asset. If you are planning a purchase around your year end, start the finance conversation early, and confirm delivery and installation dates with the supplier and your accountant.

10Documents to take to your accountant

11How we can help

1. Tell us what you are buying, its cost and whether it is new or used.
2. Check the tax position with your accountant, using the list above.
3. We approach lenders on our panel for hire purchase, leasing or a loan, as suits.
4. We set out the offers side by side so you can compare total cost alongside the tax effect.

Lenders make the final decision and we do not give tax advice. It is free to enquire; any broker fee is disclosed separately before you proceed. For more on finance costs and tax, see are business loans tax deductible.