The New 40% First Year Allowance: What It Means If You're Investing in Plant and Machinery

A new 40% allowance for equipment spending

If your business is investing in plant, machinery or equipment, the capital allowances rules have changed. From 1 January 2026, a new 40% First Year Allowance (FYA) is available for main rate expenditure, while the standard writing down allowance is being cut from April 2026. Here is what actually changed and what it means for your next purchase.

What's changed

• A new 40% First Year Allowance (FYA) applies to main rate capital expenditure incurred by companies and unincorporated businesses from 1 January 2026.

• The FYA lets you deduct 40% of qualifying expenditure from profits in the year of purchase, on top of any other allowances claimed, rather than spreading relief over many years.

• Notably, the new FYA extends to some leased assets, an area that has traditionally been excluded from the most generous capital allowances, including full expensing.

• Separately, the main rate writing down allowance (WDA), the rate at which you get relief on the remaining balance in your main capital allowances pool, is being reduced from 18% to 14%, effective from April 2026.

How it fits with the Annual Investment Allowance

• Most smaller businesses already get 100% relief in year one on qualifying spend up to the Annual Investment Allowance (AIA) limit, currently £1 million.

• The new 40% FYA is most relevant once you are spending above the AIA limit, or on expenditure, such as certain leased assets, that does not qualify for the AIA or full expensing.

• Used together, the AIA and the new FYA mean many SMEs can still get a substantial first-year deduction even on larger capital programmes.

Why the timing matters

• With the lower 14% WDA rate starting in April 2026, expenditure that misses the FYA and falls into the general pool will get relief more slowly than it did before.

• If you are planning significant equipment purchases, such as new machinery, vehicles or IT infrastructure, it is worth reviewing the timing and structure of the spend with your accountant to make sure you are claiming the most valuable relief available.

• Leasing businesses and businesses that lease in equipment should take a fresh look at whether assets that previously missed out on capital allowances now qualify under the new FYA.

FAQ

Does the 40% First Year Allowance replace full expensing?

No. Full expensing, which gives 100% relief for qualifying main rate plant and machinery, continues to run alongside the new FYA, but the FYA extends relief to some expenditure, including certain leased assets, that full expensing does not cover.

Do I need to claim the Annual Investment Allowance first?

Not necessarily, but in practice most smaller businesses use the AIA for their day-to-day qualifying spend and only need the FYA once they go over the £1 million AIA limit or for expenditure outside its scope.

What happens to the balance in my capital allowances pool?

From April 2026, the main rate pool is written down at 14% a year rather than 18%, so relief on amounts left in the pool builds up more slowly than before.

Is this relief only for large capital spend?

No. It applies to qualifying main rate expenditure of any size, though for most day-to-day purchases smaller businesses will still find the Annual Investment Allowance more straightforward.

Thinking about the timing of an equipment purchase, or want to check whether a lease arrangement now qualifies for relief it did not before? Jackson Lee Accountants works with manufacturers and SMEs across Bury, Greater Manchester and Lancashire on exactly this kind of planning. Get in touch (https://www.jacksonleeaccountants.co.uk/contact-me) to talk through your plans.

Sources: Capital Allowances: Autumn Budget 2025 - Ross Martin (https://www.rossmartin.co.uk/autumn-budget-2025/8689-capital-allowances-autumn-budget-2025), Business investment boosted with new tax relief taking effect today - GOV.UK (https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today), Claim capital allowances: Overview - GOV.UK (https://www.gov.uk/capital-allowances)