Capital allowance changes – Autumn Budget 2026

Capital allowances provide businesses with tax relief for qualifying capital expenditure by reducing taxable profits instead of giving tax relief for the depreciation charge in the accounts.

What is changing and when?

Budget 2026 increases the main-rate first-year allowance from 40% to 50% for qualifying expenditure incurred on or after 1 January 2027. It also reduces the writing-down allowance for main-rate plant and machinery from 14% to 12%. The lower writing-down allowance will apply from 1 April 2027 for Corporation Tax and 6 April 2027 for Income Tax.

These changes follow in the footsteps of the previously announced capital allowance changes in Budget 2025, which introduced the 40% allowance and reduced the writing-down allowance from 18% to 14%.

Which expenditure will qualify?

The plant or machinery must be new and unused, qualify for the main rate of writing-down allowance and not be a car.

The first-year allowance will be available to businesses subject to either Corporation Tax or Income Tax. It can also apply to qualifying assets bought for leasing, although assets used for certain overseas leasing activities are excluded.

How will businesses be affected?

The higher first-year allowance will provide more upfront tax relief for qualifying expenditure. It will be available to companies and unincorporated businesses, including sole traders and partnerships.

For example, a business spending £100,000 on qualifying equipment currently receives a £40,000 first-year deduction. For qualifying expenditure incurred from 1 January 2027, this will increase to £50,000.

The remaining balance may qualify for writing-down allowances in later accounting periods. However, these ongoing deductions will be given more slowly once the main rate falls from 14% to 12%.

Other points to note

Budget 2026 also announced a separate technical change for lease-and-leaseback arrangements. From 28 October 2026, the definition of a finance lease used by the relevant anti-avoidance rules will be expanded to include certain right-of-use leases.

Planning ahead

Many businesses may see little change on capital allowances available for new capital purchases. Companies can continue to claim full expensing on qualifying expenditure. Businesses can also use the annual investment allowance, which provides 100% relief on up to £1 million of qualifying expenditure.

The changes will matter most to businesses with existing capital allowance pools, expenditure above the annual investment allowance limit, leasing assets or expenditure that does not qualify for full expensing.

The higher first-year allowance is welcome for businesses that cannot access full expensing or the annual investment allowance. However, the reduction in writing-down allowances will slow tax relief for existing pools and other expenditure.

Businesses planning significant investment should review the available allowances before committing to a purchase date. Where commercial timing is flexible, qualifying expenditure incurred from 1 January 2027 may benefit from the higher upfront allowance. Tax should not drive the investment decision, but understanding when relief will be received can make an important difference to cash flow.

If the Budget has raised any questions for you, book your place on our question time webinar this Friday at 9:30am. Alternatively, if you would like any further information or guidance on this topic, get in touch with your usual Kreston Reeves contact or contact us here.