The UK capital allowances regime has undergone significant changes under Finance Act 2026, creating new opportunities and planning considerations for businesses investing in plant and machinery.

While many business owners focus on equipment costs, supplier pricing, and delivery schedules, the timing and structure of capital expenditure can now have a substantial impact on the amount and speed of tax relief available.

The introduction of a new 40% First-Year Allowance (FYA) from 1 January 2026 has accelerated tax relief for qualifying investments. However, to offset the cost of this new incentive, the government has reduced the main pool Writing-Down Allowance (WDA) from 18% to 14% from April 2026.

For limited companies, sole traders, and partnerships, understanding how these changes interact with the Annual Investment Allowance (AIA), Full Expensing, and existing asset pools is essential for effective tax planning.

What Has Changed Under Finance Act 2026?

The 2026 reforms create a two-tier approach to capital allowances for main-rate plant and machinery.

The New 40% First-Year Allowance

From 1 January 2026, businesses can claim a 40% First-Year Allowance on qualifying expenditure incurred on new and unused main-rate plant and machinery.

This measure extends enhanced upfront relief beyond companies and provides additional opportunities for sole traders, partnerships, and plant-hire businesses that previously had more limited access to first-year incentives.

To qualify, the asset must be:

  • New and unused.
  • Classified as main-rate plant and machinery.
  • Acquired for use within the business.

The allowance does not apply to:

  • Cars.
  • Second-hand assets.
  • Special rate assets.

The Reduction in the Main Pool Writing-Down Allowance

From 1 April 2026 for Corporation Tax purposes and 6 April 2026 for Income Tax purposes, the main pool Writing-Down Allowance has been reduced from 18% to 14%. This change affects expenditure that remains within the general main pool after any available first-year allowances or AIA claims have been applied. Importantly, the reduction does not alter the value of existing assets. Instead, it slows the rate at which unrelieved expenditure receives tax relief in future years. Businesses with substantial brought-forward pool balances may therefore find that tax relief is spread over a longer period than under the previous rules.

Why Timing Matters More Than Ever

Many business owners assume that the £1 million Annual Investment Allowance means capital allowance changes are largely irrelevant to their business. In practice, this is not always the case. Businesses that exceed the AIA limit, acquire assets that do not qualify for AIA, or carry significant brought-forward pool balances may be directly affected by the lower 14% Writing-Down Allowance. Careful planning can help maximise immediate relief while minimising expenditure that falls into slower-relief pools.

Understanding the Hybrid Rate Rules

For companies with accounting periods that span 1 April 2026, transitional rules apply. Rather than using either the old 18% rate or the new 14% rate, HMRC requires a time-apportioned hybrid rate for the entire accounting period. This rule applies regardless of when assets were purchased during that accounting period.

Example: Company with a 30 June 2026 Year-End

Assume a company has:

  • A 30 June 2026 year-end.
  • A brought-forward main pool balance of £100,000.
  • No additions or disposals during the period.

The accounting period contains:

  • 274 days before 1 April 2026, qualifying for the 18% rate.
  • 91 days from 1 April 2026 onwards, qualifying for the 14% rate.

The resulting hybrid rate is:

(274 days ÷ 365 days × 18%) + (91 days ÷ 365 days × 14%) = 17.00%

Ignoring additions and disposals, the company's Writing-Down Allowance for the year would therefore be £17,000.

By comparison, a full accounting period falling entirely under the new rules would generate a £14,000 allowance on the same £100,000 pool balance.

This illustrates why accounting period timing can have a direct effect on cash flow and tax liabilities.

Capital Allowances Planning Opportunities for 2026

Businesses considering significant capital expenditure should review the order in which allowances are claimed.

A common planning strategy involves allocating Annual Investment Allowance to assets that would otherwise receive slower relief, while preserving enhanced allowances for qualifying new expenditure.

This can help maximise total tax relief where annual investment exceeds the AIA threshold.

However, the optimal approach depends on:

  • Business structure.
  • Existing capital allowance pools.
  • Planned expenditure levels.
  • Profit forecasts.
  • Availability of Full Expensing and other enhanced reliefs.

Professional advice should always be obtained before implementing any capital allowance strategy.

Frequently Asked Questions

Should I Allocate AIA to Second-Hand Machinery?

In many cases, yes.

Because Full Expensing and the new 40% First-Year Allowance are generally restricted to new and unused assets, second-hand equipment often benefits most from AIA allocation.

Where a business purchases both new and used assets, allocating AIA to second-hand items first can preserve enhanced reliefs for qualifying new expenditure.

Are Electric Vehicles Affected by the 14% Writing-Down Allowance?

New zero-emission electric cars continue to qualify for a 100% First-Year Allowance until 31 March 2027 for companies and 5 April 2027 for unincorporated businesses.

Used electric vehicles do not qualify for this relief and will generally enter the relevant capital allowance pool where Writing-Down Allowances apply.

The treatment of hybrid and low-emission vehicles depends on their emissions classification and should be reviewed on a case-by-case basis.

Does the 40% First-Year Allowance Apply to Building Fixtures?

Generally, no.

The new 40% First-Year Allowance applies to qualifying main-rate plant and machinery.

Integral features and other special rate assets, including certain building systems such as air conditioning, electrical installations, and plumbing, remain outside the scope of the relief.

These assets continue to attract the existing special rate allowances, including the 6% Writing-Down Allowance and any applicable enhanced reliefs available to qualifying companies.

Does Full Expensing Still Exist?

Yes.

Full Expensing remains available for qualifying companies investing in new and unused main-rate plant and machinery.

The introduction of the 40% First-Year Allowance expands enhanced relief opportunities for businesses that cannot access Full Expensing, rather than replacing it.

How CoreAcc Accountants Can Help

The 2026 capital allowance changes create both opportunities and risks for businesses making significant investments.

At CoreAcc Accountants, we help businesses:

  • Review the timing of planned capital expenditure.
  • Maximise available capital allowances.
  • Optimise Annual Investment Allowance claims.
  • Calculate transitional hybrid rates accurately.
  • Align capital investment decisions with wider tax planning objectives.

Whether you are purchasing equipment, expanding operations, or reviewing existing capital allowance pools, obtaining specialist advice can help ensure you claim all available reliefs while remaining fully compliant with HMRC requirements.

Contact CoreAcc Accountants today to arrange a capital allowances review and identify opportunities to improve the tax efficiency of your future investments.

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