Capital allowances: What’s changed and what it means for you

The 2025 Autumn Budget introduced significant reforms to the UK’s capital allowances regime, with changes that are now in effect and affecting how businesses claim tax relief on investment in plant and machinery.

From 1st January 2026, a new 40% First Year Allowance (FYA) applies to qualifying expenditure on main rate plant and machinery.

At the same time, the main rate of Writing Down Allowance (WDA) reduces from 18% to 14% from April 2026.

We’ve been reviewing what these changes mean in practice for businesses across different sectors and sizes.

Who is impacted?

These changes affect different businesses in different ways:

Sole traders and partnerships

The new 40% FYA is available to unincorporated businesses, including sole traders and partnerships. This is particularly relevant for owner-managed businesses investing in equipment, machinery, or commercial fixtures.

Companies with significant capital investment plans

Businesses making substantial investment in plant and machinery may benefit from the upfront 40% deduction, especially where expenditure exceeds the £1m Annual Investment Allowance cap.

Leasing and asset-based businesses

The relaxation of certain leasing restrictions creates opportunities for businesses acquiring plant and machinery for leasing within the UK. However, overseas leasing remains excluded.

Established businesses relying on Writing Down Allowances

Businesses with capital expenditure that does not qualify for accelerated relief – or falls outside the new FYA – will feel the impact of the WDA reduction.

Relief at 14% rather than 18% slows tax deductions, potentially increasing taxable profits in the short to medium term.

Large groups with long-term asset pools

Companies with significant existing main rate pools may see a longer tail of tax relief on historic and future expenditure, affecting cash flow forecasting and deferred tax calculations.

Accelerated Relief and Cash Flow

The 40% FYA provides a faster route to upfront tax relief, complementing existing allowances such as full expensing and the Annual Investment Allowance. For businesses investing in qualifying assets, this can improve cash flow by accelerating deductions into the year of purchase.

Conversely, the lower WDA rate slows ongoing relief for expenditure that does not meet FYA criteria, requiring careful planning to optimise tax efficiency.
Planning in the new environment

With these changes now live, businesses should consult a specialist to review current and planned capital expenditure programmes. The timing of purchases, the ownership structure of assets, and whether expenditure qualifies for accelerated relief will all influence the tax position.

Get in touch for support

At Verallo, we recommend proactive modelling to assess how these changes affect cash flow and tax liabilities.
Our Chartered Tax Advisors are here to help with early analysis, ensuring your business can maximise available reliefs and navigate the evolving capital allowances framework confidently. Get in touch today.