Overview of Capital Allowances
Capital expenditure on plant and machinery is generally not deductible when calculating taxable profits (unless using the cash basis under specific rules). Instead, relief is provided through capital allowances, either as immediate deductions (first-year allowances) or over time via writing down allowances (WDAs).
Key Changes from April 2026
- Introduction of a New 40% First-Year Allowance (FYA)
A new 40% FYA will be available for expenditure onnew main rate plant and machinery:
- Effective from 1 April 2026 (companies) and 6 April 2026 (unincorporated businesses)
- Available to both companies and unincorporated businesses
- Applies to new assets (including those acquired for leasing)
- Excludes cars
This provides a middle-ground option between full expensing (100%) and WDAs.
- Reduction in Main Rate Writing Down Allowance (WDA)
- Main rate WDA will reduce from 18% to 14%
- Effective from April 2026
- Applies on a reducing balance basis
- A hybrid rate will apply where accounting periods span the change date
This change will slow down the rate at which tax relief is obtained on pooled expenditure.
First-Year Allowances vs Writing Down Allowances
- First-Year Allowances (FYAs) provide immediate relief in the year of expenditure
- WDAs spread relief over several years
While claiming FYAs often accelerates tax relief, it may not always be optimal—for example, where it leads to unused personal allowances.
Existing Reliefs Still Available
Annual Investment Allowance (AIA)
- 100% relief up to £1 million per year
- Available to all businesses
- Covers most plant and machinery (excluding cars)
- Applies to both new and second-hand assets
Full Expensing (Companies only)
- 100% relief on new main rate assets
- No upper limit
- Not available for used assets or unincorporated businesses
50% FYA for Special Rate Assets (Companies only)
- Applies to new special rate assets
- Remaining balance qualifies for 6% WDA
100% FYA for Zero-Emission Cars & Charge Points
- Available for qualifying environmentally friendly investments
Practical Considerations
For Unincorporated Businesses:
- The AIA remains the most valuable relief
- Where expenditure exceeds £1m:
- Prioritise AIA for special rate and second-hand assets
- Use the new 40% FYA for new main rate assets
- Claim WDAs on any remaining balance
For Companies:
- Full expensing and AIA will usually take precedence
- The new 40% FYA may be useful where:
- Full expensing is not available
- AIA has been fully utilised
- Assets fall outside other reliefs
Disclaimer
The information provided above summarizes proposed and upcoming changes to the UK tax system effective from April 2026. This summary is intended for general guidance only and does not constitute professional tax, legal, or financial advice.
