The budget introduced two significant changes to the UK’s capital allowances rules for providing tax relief on expenditure on qualifying plant & machinery. They are aimed at encouraging investment by accelerating relief for a wider range of businesses, however the actual impact is likely to be more nuanced and require careful planning to ensure that businesses optimise tax relief.

These reforms will apply to businesses of all sizes, from incorporated companies to sole traders, although it is only likely to be the largest companies and partnerships that incur sufficient capital expenditure for the rules to make a difference.

How do the existing rules work?

Three types of allowance are available for expenditure on ‘plant and machinery’:

• the Annual Investment Allowance(AIA), which provides a 100% allowance for the first £1,000,000 of expenditure per year
• Specific first year allowances(FYAs) also provide a 100% allowance for expenditure but restricted to particular types of plant and machinery. Examples include
• New and unused cars with low CO₂ emissions or electric cars,
• New and unused zero emission goods vehicles and
• Full-expensing on new plant and machinery by companies, offering 100% relief on qualifying new and unused assets (excluding leased assets)
• writing down allowances, which are calculated on a reducing balance basis at a percentage of 18% or 6% per year. This applies to the main rate pool, special rate pool and certain single asset pools

What are the new changes?

 With effect from 1 April 2026 (6 April 2026 for unincorporated businesses), the capital allowance rules for main rate plant and machinery expenditure will be amended to:

1. Incorporate a new 40% First-Year Allowance (FYA)

• This offers a substantial upfront deduction for businesses that:

1. cannot access full expensing (eg assets purchased for leasing) or
2. have exhausted their Annual Investment Allowance (AIA) limit

2. Reduce the rate of main pool Writing-Down Allowance (WDA) from 18% to 14%

• This will result in slower tax relief on the residual expenditure after any first-year allowances or AIA. Businesses with large pools of historic expenditure will feel this most

For periods that straddle 1 April 2026, a hybrid WDA rate will be applied pro rata to the proportions of the chargeable period falling before and after the change date. The FYA will be available for any expenditure incurred after 1 January 2026.

* 50% relief for assets which would otherwise qualify for the special rate pool

** Not available to mixed partnerships

Comparing Old vs New Rules

 Scenario:
A business invests £500,000 in qualifying plant and machinery on 1 February 2026. It has already used its AIA for the year and is not eligible for full expensing.

Under Old Rules (Pre-April 2026)

• No FYA available.
• Entire £500,000 goes into the main pool.
• Year 1 WDA (18%): £500,000 × 18% = £90,000
• Total Year 1 relief: £90,000
• Time taken to obtain 95% relief on expenditure: 16 years

Under New Rules (Post-April 2026)

• 40% FYA: £500,000 × 40% = £200,000 upfront.
• Remaining balance: £500,000 − £200,000 = £300,000.
• Year 1 WDA (14%):  £300,000 × 14% = £42,000.
• Total Year 1 relief: £200,000 + £42,000 = £242,000.
• Time taken to obtain 95% relief on expenditure: 17 years

Impact:
Under the new regime, the business claims £242,000 in Year 1 compared to £90,000 under the old rules— this significantly improves upfront relief, although it will ultimately take longer to fully relieve the expenditure.

This does however assume that the asset qualifies for the 40% FYA. If it does not (eg second hand assets), then the total year 1 relief will be £70,000, and it will take 20years to obtain 95% relief for the total expenditure incurred. It is therefore important to check that the asset qualifies for this allowance before relying on this as part of your planning for any significant capital expenditure.

Practical Implications for Business Owners

Investment Decisions:

• Businesses planning significant capital expenditure should model scenarios under the new rules to optimise timing and relief.

Timing of Investments

• Accelerate purchases before April 2026 if relying on the current 18% WDA.

Cash Flow Planning

• The new FYA front-loads relief, improving short-term cash flow compared to the slower WDA allowances.
• However, the reduced WDA means less relief in later years—factor this into long-term projections.
• Reduced WDAs will affect deferred tax positions and long-term profitability.
• For new investments after January 2026, consider whether the 40% FYA, full expensing or WDA offers the best outcome.

Compliance

• Ensure accurate categorisation of assets to maximise relief and assure above cash flow model is accurate.

Sector Impact:

• The inclusion of leased assets under the new FYA is a major win for leasing providers, who previously missed out on full expensing.
• Unincorporated manufacturing, construction, and logistics firms with heavy plant investment will also benefit from the new FYA.
• Industries that traditionally make us of mixed partnerships, such as farming, may also benefit from the 40% FYA, although with this, the devil may be in the detail, and so we await details of the draft legislation with interest.

Full details of the proposed legislation will be released with the draft Finance Bill 2025-26 in due course, and we will issue further updates to explain any important changes as soon as we have reviewed this.