Capital allowances changes – Autumn Budget 2025

What’s changing and when?

Capital allowances allow businesses to write off the costs of capital assets, such as plant or machinery, against their taxable income.

From 1 January 2026, a new 40% first‑year allowance (FYA) will be introduced for qualifying expenditure on plant and machinery. Whilst the rate of relief is not as generous as seen under the super‑deduction and full expensing rules, this FYA extends to unincorporated businesses (such as sole traders and partnerships) and assets purchased for leasing, which were previously excluded from FYAs.

Furthermore, from April 2026, the standard writing-down allowance (WDA) for main‑rate assets will reduce from 18% to 14% per annum. This applies from 1 April for companies and 6 April for sole traders and partnerships, with transitional rates for periods straddling those dates.

Which types of expenditure are affected?

The new 40% FYA applies to main‑rate qualifying plant and machinery purchased from January 2026 onwards, excluding cars and second‑hand assets, and provides accelerated tax relief for leasing assets and unincorporated businesses. However, there will be a specific exclusion for assets purchased for leasing overseas.

The 14% WDA replaces the former 18% rate on existing main‑rate pools (excluding, for example, special‑rate items with long useful lives or high emissions) from the April 2026.

How are companies and unincorporated businesses affected?

Companies

As companies can already benefit from unlimited full expensing and £1 million of annual investment allowance (AIA), which both offer 100% tax relief, this new 40% FYA is only likely to be of interest to companies that purchase assets for leasing (that do not qualify for full expensing or the AIA). In such a case, they will benefit from the upfront 40% deduction on qualifying expenditure from January 2026, reducing the post-tax cost of the investment. However, future tax relief on the balance via WDA will be slower at 14% rather than 18%.

Unincorporated businesses

These businesses will now have access to a 40% FYA, perhaps filling a gap in previous allowances. In particular, partnerships that have corporate partners, which cannot utilise the AIA, may now be able to obtain better relief on qualifying capital expenditure. However, as with companies, their ongoing WDA will also reduce to 14%.

Other points to note

In addition, the government has announced that they will extend the 100% FYA for qualifying expenditure on zero emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle (EV) charge points for a further year.

The Chancellor also reiterated her commitment to full expensing and the above measures do not change the WDA on the special rate pool, which is currently 6%.

Planning

Whilst the introduction of a new FYA is welcome, particularly for unincorporated and leasing businesses, this does add a further layer of complexity. As always with capital investment, expenditure should be planned and timed to ensure maximum capital allowances are obtained. For example, companies that are planning to purchase equipment for leasing may want to delay capital expenditure until January 2026 to obtain relief under the new FYA.

We work closely with our clients so that they can maximise capital allowances claims and will be working alongside them to ensure they use the new regime to their advantage.

If the Budget has raised any questions for you, or 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.