If you’re planning to invest in equipment, machinery, or other business assets over the next couple of years, there are important capital allowance changes on the way.
From 2026, the Government is introducing a new 40% first-year allowance (FYA), while at the same time reducing the writing down allowance (WDA). Depending on how and when you invest, this could either accelerate your tax relief – or slow it down.
Here’s what’s changing and how it might affect your business.
What is the new 40% first-year allowance?
From April 2026, a new 40% FYA will be available on qualifying new main rate assets, excluding cars.
Both companies and unincorporated businesses will be able to claim it:
- Corporation tax: available from 1 January 2026
- Income tax: available from 6 April 2026
This allowance lets you deduct 40% of the cost of qualifying assets in the year of purchase, with the remaining balance relieved over time.
How does this fit with existing allowances?
Businesses already have a few ways to claim tax relief on capital spending.
Annual Investment Allowance (AIA)
The AIA gives 100% relief on qualifying expenditure on new and used assets, up to £1 million per year. It applies to both main rate and special rate assets.
Full expensing (companies only)
Companies can also claim full expensing, which allows 100% relief on new main rate assets, with no upper limit.
Because full expensing is unlimited, the new 40% FYA will mainly be useful where full expensing isn’t available – for example, for assets used in leasing.
Unincorporated businesses
Unincorporated businesses don’t qualify for full expensing. While they can use the AIA, the new 40% FYA becomes valuable when:
- The AIA has already been fully used, or
- The expenditure qualifies for the 40% FYA but not the AIA
Where the 40% FYA is claimed, the remaining cost is added to the main pool and relieved through WDAs.
What about cash basis vs accruals?
For many sole traders, the cash basis is now the default. Under this basis, most capital expenditure can be deducted immediately when calculating profits.
However, some items – cars in particular – are excluded. In these cases, capital allowances still apply unless simplified mileage expenses are used.
Capital allowances are more relevant where a trader uses the accruals basis, making the new 40% FYA especially helpful in the right circumstances.
The downside: writing down allowances are being reduced
From 1 April 2026 (corporation tax) and 6 April 2026 (income tax), the main rate WDA will fall from 18% to 14%.
This means:
- Relief on main rate assets will be spread over a longer period
- Businesses that don’t (or can’t) claim AIA, full expensing, or the new 40% FYA will feel the impact most
Cars are a key example. Apart from new zero-emission cars, vehicles don’t qualify for FYAs. Low-emission cars go into the main pool, so the lower WDA means it will take longer to get full tax relief than it does now.
Hybrid rates where periods span the change
If your accounting period straddles the rate change, a hybrid WDA will apply.
For example, a company with a year end of 30 June 2026 will use a blended rate of 17%, reflecting part of the year at 18% and part at 14%.
Why timing and planning matter
These changes make the timing of capital investment more important than ever.
Should you bring spending forward?
Does full expensing apply?
Is the new 40% FYA the best option for your situation?
The right answer depends on how your business is structured and how you prepare your accounts.
Need help deciding what’s best?
Capital allowances are an area where good planning can make a big difference to cash flow.
If you’re planning asset purchases or want to understand which allowances you should be using, get in touch with Jon or the team at Jon Davies Accountants. We’ll help you claim the right relief, at the right time.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
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