Capital allowances play an important role in how businesses recover the cost of investing in plant, machinery, and other qualifying assets. They directly affect taxable profits, cash flow, and longer-term investment decisions. As a result, even relatively small changes to the rules can have a meaningful financial impact.
Following Budget 2025, the government confirmed a number of updates to the capital allowances regime. While several existing reliefs remain available, others are being adjusted, altering the pace at which tax relief is received. At Nordens, we are already working with businesses to review capital expenditure plans and existing allowance pools in light of these changes, helping them understand where the impact may be felt and where opportunities still exist.
What are capital allowances?
Capital allowances provide tax relief on qualifying capital expenditure such as vans, machinery, computers, equipment, and certain fixtures within commercial property. They replace accounting depreciation, which is not deductible for tax purposes.
Who is affected?
The changes announced at Budget 2025 may impact:
- Unincorporated businesses such as sole traders and partnerships
- Companies with historic pools of unrelieved capital expenditure
- Leasing businesses
- Owners of commercial property
- Businesses subject to Income Tax or Corporation Tax
Businesses that regularly invest in assets or continue to claim writing down allowances on older expenditure are most likely to feel the effects.
What is changing?
Introduction of a new 40% First Year Allowance
From 1 January 2026, a new permanent 40% First Year Allowance (FYA) will be introduced for main rate plant and machinery expenditure.
This allowance is intended to support investment where existing reliefs, such as the Annual Investment Allowance or full expensing, are not available. It has fewer restrictions than other first year allowances and is available to both companies and unincorporated businesses.
The main beneficiaries are expected to include:
- Unincorporated businesses with capital expenditure exceeding the £1 million Annual Investment Allowance limit
- Businesses operating in the leasing sector, which are currently excluded from most accelerated reliefs
Reduction in writing down allowances
The rate of writing down allowance (WDA) for the main pool of plant and machinery will reduce:
- From 18% to 14% from 1 April 2026 for companies
- From 6 April 2026 for unincorporated businesses
This change slows the rate at which tax relief is obtained for expenditure not covered by first year allowances or the Annual Investment Allowance.
Are there any exclusions?
The new 40% First Year Allowance will not be available for:
- Overseas leasing
- Second hand assets
- Cars
Second hand assets may still qualify for the Annual Investment Allowance where the relevant conditions are met.
What if your accounting period spans April 2026?
Where a chargeable period spans the change date, a hybrid writing down allowance rate will apply. This is calculated based on the proportion of the accounting period before and after April 2026.
For example, a business with a year end of 30 September 2026 will apply an effective main pool writing down allowance rate of 16%.
What is not changing?
Several key reliefs remain unchanged:
- The £1 million Annual Investment Allowance continues at 100%
- Full expensing at 100% on main pool assets remains available to companies
- 50% first year allowances for special rate pool assets remain unchanged
- Writing down allowances on the special rate pool remain at 6%
- The 100% First Year Allowance for electric vehicle charging points and zero emission cars has been extended to 31 March 2027 for companies and 5 April 2027 for income tax businesses
Who is most likely to be impacted
For many businesses that claim relief in full through the Annual Investment Allowance or full expensing, there may be little change to the timing of tax relief.
However, businesses with historic capital allowance pools, or expenditure that does not qualify for first year allowances, may see relief spread over a longer period due to the reduction in the writing down allowance rate.
Unincorporated businesses with significant capital expenditure above the Annual Investment Allowance threshold, along with businesses operating in the leasing sector, are more likely to benefit from the introduction of the new 40% First Year Allowance.
What should businesses consider now?
These changes reinforce the importance of planning capital expenditure carefully. Decisions around when to invest, whether to lease or purchase assets, and how expenditure is structured could materially affect the timing of tax relief and overall cash flow.
How Nordens can support you
At Nordens, we support businesses by:
- Reviewing existing capital allowance pools and historic claims
- Advising on the timing and structure of future capital expenditure
- Identifying opportunities to maximise available reliefs
- Ensuring compliance while supporting cash flow planning
If you would like to understand how these changes apply to your business, our team would be happy to provide tailored advice.
