Capital allowances have had some big changes this year and they may affect how your business approaches investment, tax planning and cash flow management.
The reforms announced in the Autumn Budget 2025 introduced a new 40 per cent First Year Allowance (FYA) and a reduction in the Writing Down Allowance (WDA).
If your business is investing in equipment, machinery or leased assets, you need to understand what these changes mean so that you can avoid paying more tax than you need to.
What is the new First Year Allowance (FYA)?
Since 1 January 2026, companies have been able to claim a 40 per cent FYA on qualifying new and unused main-rate plant and machinery.
This relief has now been extended to sole traders and partnerships since 6 April 2026.
The relief allows 40 per cent of the asset’s cost to be deducted from taxable profits in the year of purchase.
The remaining 60 per cent is added to the main capital allowances pool and relieved over time through WDAs.
The new FYA is available to:
- Companies subject to Corporation Tax
- Sole traders
- Partnerships and LLPs
- Businesses purchasing qualifying assets for UK leasing
This is particularly important for unincorporated businesses, which cannot claim Full Expensing and leasing businesses that were previously excluded from upfront relief.
The qualifying assets usually include:
- Manufacturing and production machinery
- Office equipment and IT systems
- Fixtures and fittings
- Tools and trade equipment
- Certain leased plant and machinery
The allowance does not extend to cars, second-hand or used assets, special rate pool items and assets leased overseas.
How has the Writing Down Allowance (WDA) changed?
WDAs are known for spreading tax relief over several years by applying a percentage to the reducing balance of your capital allowance pool.
Since 1 April 2026 for companies and 6 April 2026 for unincorporated businesses, the main rate WDA has reduced from 18 per cent to 14 per cent.
This reduction means that businesses with existing main-rate pool balances will receive tax relief more slowly in future years.
As a result, some businesses could see higher taxable profits compared to previous years.
How could the Capital Allowance changes affect your business?
The new 40 per cent FYA increases the tax relief for qualifying new investments and can improve short-term cash flow for many businesses.
However, the lower WDA rate reduces the speed of relief on non-qualifying or historic expenditure.
Businesses that regularly invest in plant and machinery will need to carefully review:
- The timing of a purchase
- The type of assets being acquired
- Whether other reliefs are available
- The impact on future taxable profits
For example, companies may still be able to use Full Expensing or the £1 million Annual Investment Allowance (AIA) before claiming 40 per cent FYA.
Seeking early financial support can help you choose the correct relief and apply it in the right order.
Why is tax planning so important?
Your business needs to be proactive in its tax planning to help maximise the available relief and protect your cash flow.
You should be:
- Reviewing any planned capital expenditure
- Assessing the impact of the WDA on existing pools
- Reviewing if purchases should be accelerated or delayed
- Ensuring expenditure qualifies before committing funds
- Keeping documentation to support claims
With the right financial advice, your business can make informed investment decisions and make the most out of the available reliefs.
If you need further advice on how the new capital allowance reforms affect your business, contact us.
