Everything You Need To Know About UK’s New 40% First‑Year Allowance

Published by Nida Umair posted in Capital allowances on January 6, 2026

From 1 January 2026 the UK offers a new 40% first‑year allowance (FYA) for plant and machinery. Announced in the Autumn Budget 2025, the permanent relief lets businesses deduct 40 per cent of qualifying expenditure from taxable profits in the year of purchase. It complements full expensing and the £1 million annual investment allowance (AIA) and is designed to encourage investment where those reliefs are unavailable. This guide explains how the allowance works, who can benefit and how to plan for it.

What is the 40% first‑year allowance?

Capital allowances let UK businesses offset the cost of capital assets against tax. The new 40% FYA provides accelerated relief on main‑pool plant and machinery that does not qualify for full expensing. Businesses can claim a 40 per cent deduction in the year of purchase and then claim writing‑down allowances (WDAs) on the remaining balance. This front‑loads tax relief compared with the standard WDA, which spreads relief over several years, thereby improving cash flow and encouraging investment.

Key features of new first-year allowance

Rate and permanence: The FYA is a permanent 40% deduction for new main‑rate plant and machinery.
Complementary to existing reliefs: Businesses should still use full expensing and the AIA where available because they provide 100% relief. The 40% FYA applies when full expensing or the AIA is unavailable or exhausted.
Follow‑up WDAs: The remaining 60% of the asset’s cost continues to receive relief through annual WDAs, which will fall to 14% from April 2026.
Not a super‑deduction: Unlike previous temporary measures, the new FYA is permanent and sits alongside full expensing and the AIA.

Who Can Claim the 40% FYA?

One of the most significant aspects of this measure is its broad eligibility:

Companies and unincorporated businesses – the relief is available to businesses subject to corporation tax and those subject to income tax (sole traders, partnerships and LLPs).
Businesses investing in leased assets – the allowance applies to assets bought for leasing. This corrects a long‑standing exclusion that prevented leasing companies from accessing full expensing. It is therefore particularly valuable for hire companies and equipment‑rental businesses.
Large and small businesses – there is no cap on qualifying expenditure, so the relief benefits businesses of all sizes. However, companies should still use their £1 million AIA first.

Qualifying and Excluded Expenditure

Only main‑pool expenditure qualifies. The main pool covers most plants and machinery used in a trade, such as manufacturing equipment, office computers, fixtures and fittings, shop fittings, and trade tools. The following points summarise eligibility:

Qualifying items

New plant and machinery used in the business (e.g., machinery, equipment, office and shop fittings, furniture, and kitchen and catering equipment).
Assets bought for leasing, including hire fleet vehicles and rental equipment.
Assets purchased for leasing within the UK – overseas leasing is excluded.

Excluded items

Cars – even low‑emission cars do not qualify for the 40% FYA.
Second‑hand or used assets – the FYA applies only to new expenditure.
Special‑rate pool assets – integral features (e.g., lifts, electrical systems) remain in the special pool and are not eligible.
Assets leased overseas – leasing to overseas businesses remains outside the scope of the FYA.

When Does the New First-Year Allowance Apply?

For corporation tax, expenditure incurred on or after 1 January 2026 qualifies for the 40% FYA. For income taxpayers (sole traders and partnerships), the allowance applies from 6 April 2026. Businesses should therefore plan their capital expenditures around these dates to maximise relief. Purchases made before January 2026 will not benefit from the 40% FYA and will instead attract the existing WDAs.

Relationship With Full Expensing and AIA

Full expensing allows companies to deduct 100% of qualifying new main-rate plants and machinery from taxable profits. It remains available until at least 31 March 2026 and is expected to continue permanently for companies, although the government may review details. Annual investment allowance (AIA) provides 100% relief on up to £1 million of qualifying expenditure for companies and unincorporated businesses each year.

The 40% FYA complements these reliefs:

Use full expensing first: Companies should always claim full expensing when eligible because it provides 100% immediate relief.
Use the AIA next: Businesses should utilise the £1 million AIA before considering the FYA because it also offers 100% relief.
Claim the 40% FYA when other reliefs are unavailable: The FYA is particularly valuable for expenditure on assets excluded from full expensing (e.g., assets bought for leasing) or once a business has exhausted its AIA limit.

Reduction of Writing‑Down Allowances

To finance the new FYA, the government will reduce the main rate of WDAs from 18% to 14% per year. The write-down allowance changes apply from April 1, 2026, for corporation tax and April 6, 2026, for income tax. Businesses should therefore expect slower tax relief on non‑qualifying expenditure and existing main‑pool balances. The reduction makes the 40% FYA more attractive, as it allows a larger upfront deduction before the lower WDA rate applies.

Why does 40% FYA matter?

Boosts cash flow: Accelerated relief reduces taxable profits in the year of investment, freeing cash for reinvestment.
Encourages investment: It addresses calls to extend reliefs to assets not covered by full expensing, particularly leased equipment.
Supports unincorporated businesses: Sole traders and partnerships, who cannot claim full expensing, gain access to substantial upfront relief for the first time.
Balances the WDA reduction: With annual WDAs falling to 14%, the FYA mitigates the impact by providing greater relief in the first year.

Tax Planning Tips

Proper planning will help businesses maximise the benefits of the new FYA.

Review expenditure timing: Purchases made on or after 1 January 2026 (6 April 2026 for income tax) qualify for the FYA. Consider delaying acquisitions until after these dates to benefit from the relief.
Use available allowances in order: Claim full expensing (companies only) and the AIA before using the FYA. This ensures the greatest possible deduction.
Assess leasing strategies: If your business buys assets for leasing, the FYA provides upfront relief previously unavailable. The FYA applies only to UK leasing; overseas leasing remains excluded.
Model cash‑flow impact: The reduction of WDAs to 14% increases the tax burden on existing main‑pool balances. Modelling can help determine whether accelerating purchases to claim full expensing or delaying them to claim the FYA offers the best outcome.
Maintain records: Keep detailed records of qualifying expenditure, especially when assets are leased, to ensure the correct claim and avoid HMRC challenges.

Example of How the 40% First-Year Allowance Works in Practice

A self-employed mechanic purchases new diagnostic tools and workshop machinery costing £85,000 in February 2027. His Annual Investment Allowance had already been fully used earlier in the year, and full expensing was not available to him.

He claims the 40% First-Year Allowance, giving an immediate deduction of £34,000 (£85,000 × 40%) against taxable profits.

The remaining £51,000 is added to the main pool and qualifies for writing-down allowances at 14% in the following tax years.

If the mechanic pays income tax at 45%, the first-year tax reduction from the FYA alone is £15,300 (£34,000 × 45%).

This approach provides faster tax relief and improves short-term cash flow, even where full expensing is unavailable.

How Apex Accountants Can Help

We specialise in helping our clients navigate complex tax regimes and capital allowances. Our services include:

Capital allowances reviews: We identify all qualifying plant and machinery within your business and ensure you maximise claims under full expensing, the AIA, the 40% FYA and other reliefs.
Tax planning and modelling: Our experts model the impact of the new 14% WDA and the 40% FYA on your cash flow, helping you decide whether to accelerate or defer purchases. We also advise on the interplay between capital allowances and other reliefs like research and development tax credits.
Leasing strategy advice: For businesses that purchase assets as leases, we design optimised financing and leasing structures to maximise tax efficiency while complying with the new rules.
Compliance and claim preparation: We prepare capital allowance calculations and submit claims to HMRC, ensuring proper documentation and minimising the risk of queries.
Strategic business advice: Beyond capital allowances, we provide broader tax and accounting support, helping you navigate payroll changes, corporation tax planning and investment reliefs.

FAQs

1. When does the 40% FYA start?

For corporation tax, expenditure incurred from 1 January 2026 qualifies. For unincorporated businesses within income tax, the allowance applies from 6 April 2026.

2. Can I claim the FYA alongside the Annual Investment Allowance?

Yes. You should use your AIA first to claim 100% relief on up to £1 million of qualifying expenditure. Once the AIA is exhausted, any additional qualifying expenditure can benefit from the 40% FYA.

3. Can sole traders and partnerships claim the FYA?

Yes. Sole traders, partnerships, and limited liability partnerships can claim the 40% FYA, unlike full expensing, which is only available to companies.

4. Does the FYA apply to second‑hand assets or cars?

No. The new allowance is restricted to new plant and machinery. Secondhand assets and cars are specifically excluded.

5. Can I claim full expensing and the FYA on the same asset?

No. If an asset qualifies for full expensing or the AIA, you cannot also claim the 40% FYA. Choose the relief that provides the greatest deduction.

6. Is the 40% FYA permanent?

Yes. The allowance is intended to be a permanent feature of the capital allowances regime. However, future governments could amend rates, so keeping abreast of legislative updates is advisable.

7. What happens to the remaining 60% of expenditure?

The remaining cost enters the main pool and attracts writing‑down allowances. From April 2026 the main rate WDA will be 14% (reducing‑balance basis).

8. Does the FYA apply to integral features (e.g., electrical installations)?

Integral features fall into the special rate pool and do not qualify for the 40% FYA. These assets attract a 6% WDA.

9. Is leasing equipment overseas eligible?

No. The FYA excludes assets leased overseas. Only assets leased to UK customers qualify.

10. Should I accelerate purchases to claim the FYA?

It depends. Companies that can claim full expensing may prefer to accelerate purchases before March 2026 to lock in 100% relief. Those investing in leased equipment or unincorporated businesses may benefit from delaying purchases until after 1 January 2026 to access the FYA.

Conclusion

The 40% first‑year allowance represents a significant change to the UK capital allowances regime. By allowing businesses to deduct 40% of the cost of qualifying main pool plants and machinery in the year of purchase, it delivers a meaningful cash flow benefit. Unincorporated businesses and the leasing industry, previously excluded from full expensing, find the relief particularly valuable. However, the writing-down allowance change from 18% to 14% means that planning is critical. To maximise tax relief, businesses should understand the timing rules, prioritise full expensing and the AIA, and seek professional advice when necessary. With careful planning, the new 40% FYA can support investment, improve cash flow and help your business grow.