Capital Allowances on Software: AIA, Full Expensing, and WDAs

Capital allowances on software let a UK business deduct the cost of buying or perpetually licensing computer software from its taxable profits, because tax law treats software as plant. For most businesses, the full price of a qualifying purchase can be written off in the year it is bought, either through the Annual Investment Allowance or, for companies, full expensing. Anything left over is relieved gradually through the main pool at 14% from April 2026.¹

Which Software Purchases Qualify

Capital allowances only apply to capital expenditure. The dividing line sits between acquiring a lasting asset and paying for ongoing access.

A perpetual licence or an outright purchase gives the business a long-term benefit that stretches beyond a single accounting period. That is capital expenditure, and it enters the capital allowances system. Enterprise resource planning systems, bespoke applications built to order, and perpetual design-tool licences typically sit here. HMRC’s internal guidance treats capital spending on the right to use or deal with computer software as expenditure on plant, whether the software is installed on your own hardware or hosted elsewhere.²

SaaS subscriptions and rolling monthly or annual licences work differently. The business never acquires a lasting asset, so these payments are revenue expenditure and go straight against trading profits in the period they arise. Think of them like rent: you pay for access, and when you stop paying, the access disappears. Capital allowances do not apply.

Getting the classification wrong is expensive either way. Treating a perpetual licence as a revenue cost forfeits the first-year allowances that could wipe out the whole price. Treating a subscription as capital expenditure inflates the balance sheet and delays a deduction that should have been immediate.

Annual Investment Allowance

The Annual Investment Allowance (AIA) lets a business deduct the full cost of qualifying plant and machinery, including software, in the year of purchase. The current limit is £1,000,000 per year.³ For most small and medium-sized businesses, that ceiling comfortably covers the whole annual technology budget, so the full price of a software purchase reduces taxable profit straight away.

The AIA is open to companies, sole traders, and partnerships whose members are all individuals. Connected businesses share a single allowance. If one person controls two or more limited companies, those companies split a single £1,000,000 AIA between them. The same principle applies to a sole trader running multiple businesses from the same premises or in similar activities.³

Because the AIA covers new and second-hand assets alike, it is usually the simplest route to full relief on software. The one real limitation is the annual cap. If your qualifying spend goes above £1,000,000, the excess has to be relieved through full expensing or writing down allowances.

Full Expensing for Companies

Full expensing gives a 100% first-year allowance on qualifying new main-rate plant and machinery, with no monetary cap. It was made permanent by the Finance Act 2024.⁴ Software sits in the main rate pool, so a company buying new software can deduct the whole cost against corporation tax profits in the year of purchase.

Two restrictions matter. Only companies within the charge to corporation tax can claim; sole traders and partnerships are excluded.⁵ And the asset must be new and unused, so second-hand software does not qualify.⁶

For companies spending well above the AIA limit on technology, full expensing removes the ceiling. A company investing £3,000,000 in a new enterprise platform can deduct the full amount in year one, with no need to spread the balance over later periods.

Writing Down Allowances

When software expenditure exceeds the AIA, when the software is second-hand and so rules out full expensing, or when an unincorporated business has already used its AIA, the leftover cost enters a pool and is relieved through writing down allowances.

Software normally sits in the main pool. From 1 April 2026 for corporation tax and 6 April 2026 for income tax, the main pool rate is 14%, down from 18%.¹ The deduction is calculated on a reducing-balance basis, applied each year to whatever value remains in the pool rather than the original cost.⁷

A worked example. If your main pool balance is £10,000 at the start of a chargeable period beginning after April 2026, the year’s allowance is £1,400. Next year, 14% applies to the remaining £8,600, giving £1,204. The process continues until the pool is exhausted or the asset is disposed of.

Once the unrelieved balance in the main pool drops to £1,000 or below, a small pools allowance can write off the remaining amount in one go, rather than chipping away at a tiny figure year after year.⁷

Businesses whose accounting periods straddle April 2026 use a blended rate set by the Finance Act 2026, weighting the old 18% by the number of days before the changeover and the new 14% by the days on or after it.¹ Accounting software will usually handle the split automatically.

Short-Life Asset Elections

Software often has a useful life much shorter than the time writing down allowances need to grind through a pool balance. A short-life asset election pulls the software out of the main pool and into a single-asset pool of its own. If the software is disposed of within eight years, any unrelieved cost becomes a balancing allowance, giving a deduction for the leftover value in that final period instead of leaving it stranded in the main pool.

This is particularly useful for software you already expect to replace within a few years. Without the election, the residual value after disposal simply stays in the main pool, and relief trickles out slowly against the reducing balance. The election has to be made within the time limit for amending the tax return for the period in which the expenditure was incurred.

The Intangible Fixed Assets Alternative

Companies within the charge to corporation tax have a second route for acquired software: the intangible fixed assets regime under Part 8 of the Corporation Tax Act 2009. Under that regime, the accounting treatment drives the tax deduction. If the software is written down in the accounts over five years, the same pattern flows through for tax.

Section 815 of the CTA 2009 lets a company elect out of the intangible regime for capital expenditure on software and keep it inside the capital allowances system.⁸ The election is irrevocable and must be made within two years of the end of the accounting period in which the expenditure was incurred. Most companies elect into capital allowances because the AIA or full expensing gives faster relief than spreading deductions across the amortisation period. For software acquired as part of a wider business purchase, though, the intangible regime can produce a better result.

When You Sell or Scrap the Software

Selling, scrapping, or ceasing to use the software triggers a disposal event. The disposal value, usually the sale price or nil if scrapped, is deducted from the relevant pool. If the disposal value is more than the remaining pool balance, the excess is a balancing charge, effectively clawing back allowances that turned out to be too generous relative to what the software actually cost the business. If the pool balance is higher than the disposal value, the difference stays in the pool and keeps attracting writing down allowances.

For software in a single-asset pool under a short-life asset election, the pool closes on disposal, and any shortfall becomes a balancing allowance in that period. That is the main reason to make the election on software with a predictably short life.

Where full expensing was claimed, disposal values are brought into account in full, which can produce a larger balancing charge than under the AIA. It is worth weighing that trade-off before choosing which relief to apply to high-value software you may replace within a few years.

Records and How to Claim

Keep documents that show the spending is capital rather than a subscription. At a minimum, retain the purchase invoice with the date, vendor, and description, along with the licence agreement itself for a perpetual licence. Proof of payment completes the audit trail.

Companies report capital allowances in the CT600 Company Tax Return, feeding the computation into the trading profit or loss calculation, or into the non-trading section where the software is not used directly in a trade.⁹ Sole traders and partners use the capital allowances section of the Self Assessment return. Whichever form applies, allocate expenditure to the correct pool and carry the written-down value forward accurately from one period to the next.

1
Legislation.gov.uk. Finance Act 2026
2
GOV.UK. Computer Software and Rights Are Plant – HMRC Internal Manual
3
GOV.UK. Claim Capital Allowances: Annual Investment Allowance
4
GOV.UK. Capital Allowances – Permanent Full Expensing
5
GOV.UK. Claim Capital Allowances: Full Expensing and 50% First-Year Allowance
6
Legislation.gov.uk. Finance (No. 2) Act 2023 – Capital Allowances
7
GOV.UK. Work Out Your Writing Down Allowances: Rates and Pools
8
Legislation.gov.uk. Corporation Tax Act 2009 Part 8
9
GOV.UK. CT Computations Format 1.1