Jul 29

2026

Navigating the 2026 capital allowance changes: maximising the new 40% first-year rate

A permanent 40% first-year allowance is available for qualifying expenditure incurred from 1 January 2026. It allows businesses to deduct 40% of the cost of eligible new and unused main-rate plant and machinery from taxable profits in the period of purchase. The remaining 60% can receive writing-down allowances in later periods.

The allowance is open to companies and unincorporated businesses, including sole traders and qualifying partnerships. It can also cover many assets purchased for leasing where the statutory conditions are met. However, it does not apply to cars, second-hand equipment or special-rate assets. For many SMEs, the £1 million Annual Investment Allowance remains the better starting point. Our guide to how a tax accountant supports small businesses explains why planning before purchase matters.

What changed in 2026?

The 40% allowance was announced at Budget 2025 and introduced through the Finance Act 2026. The main-pool writing-down allowance rate also fell from 18% to 14% from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. A hybrid rate applies where an accounting period spans the relevant date. The special-rate pool remains at 6%.

Who benefits most?

The new allowance is especially useful where the Annual Investment Allowance has already been used, an unincorporated business is investing above its available AIA, or a leasing business cannot claim full expensing.

Leasing claims need careful checking. Qualifying assets may be leased to UK businesses or UK-resident customers where the tax-use conditions are satisfied. Non-qualifying overseas leasing can prevent a claim, so lessors should retain contracts and evidence showing how each asset and any subleased equipment are used.

Second-hand assets cannot receive the 40% allowance, although they may still qualify for AIA. Integral features and other special-rate expenditure are also excluded. Allocating AIA strategically can therefore produce a better result than automatically using it against main-rate purchases. Current management accounts can model the effect on taxable profit and cash flow.

The effect of the 14% writing-down rate

The reduction from 18% to 14% slows relief on historic main-pool balances and expenditure that receives no upfront allowance. It does not normally reduce the total relief available, but it spreads deductions over a longer period.

Businesses with substantial pooled expenditure, including qualifying cars and older equipment, should forecast the effect on tax payments. Monitoring key monthly figures helps prevent investment decisions from creating avoidable cash pressure.

A practical example

A plant-hire company buys £1.4 million of qualifying new main-rate machinery for eligible UK hire. Assuming the full £1 million AIA is available, it could claim AIA on £1 million and the 40% allowance on the remaining £400,000.

That creates a £160,000 first-year deduction on the excess, leaving £240,000 for later writing-down allowances. Without the 40% claim, and assuming a full-year 14% rate, the initial writing-down allowance on £400,000 would be £56,000. The additional first-period deduction is therefore £104,000, although the tax saved depends on the business’s tax rate and circumstances.

The SME business solutions team can compare the available claims before expenditure is committed.

Plan investments around the rules

Ireland has a separate regime, so businesses operating across both countries should review asset ownership and use with the cross-border accounting and tax team. Where investment creates cash pressure, early recovery and restructuring advice can protect working capital. If a claim is challenged, forensic accounting support can strengthen the evidence.

The 40% rate should be considered alongside AIA, full expensing, the 50% allowance and writing-down allowances. The SME business solutions team at SCC Chartered Accountants can model the strongest available treatment before your next major purchase.