Businesses investing in equipment may soon be face a more complex capital allowances regime, following the staggered implementation of changes announced in the 2025 and 2026 Autumn Budgets.
As the Government introduces highly targeted tax reliefs for varying kinds of investments, accompanied by stricter compliance, capital allowances are becoming increasingly complex.
Writing Down Allowance
In April 2026, the main rate of Writing Down Allowance (WDA) for plant and machinery was reduced from 18 per cent to 14 per cent.
Where WDAs are the only relief available to a business, tax relief may arrive more slowly and investment may become a greater cost burden over time.
To offset the potential fallout, the Government introduced a 40 per cent First Year Allowance (FYA) on 1 January 2026, for qualifying main rate expenditure.
This allows businesses to claim 40 per cent of the cost of eligible plant and machinery in the first year, with the remaining 60 per cent entering the main pool at 14 per cent.
The relief is particularly valuable to unincorporated businesses and leasing businesses that cannot make use of full expensing, though it does not apply to cars or second-hand purchases.
Further changes in the Autumn Budget
Chancellor John Healey announced further changes to capital allowances in his Autumn Budget on 28 October 2026, building on the reforms introduced earlier this year.
The main rate of WDA will be cut again, from 14 per cent to 12 per cent. The lower rate will apply from 1 April 2027 for companies paying Corporation Tax and from 6 April 2027 for businesses paying Income Tax.
At the same time, the FYA for qualifying main rate expenditure will rise from 40 per cent to 50 per cent for expenditure incurred on or after 1 January 2027.
For example, a business spending £100,000 on qualifying new equipment in 2027 could claim £50,000 in the first year, compared with £40,000 at the current rate.
The remaining £50,000 would then enter the main pool and attract WDAs at the new lower rate.
Full expensing remains in place for companies and the Annual Investment Allowance is unchanged.
The changes continue the Government’s shift towards giving more relief up front on new investment, while relief on balances left in the main pool is becoming slower.
Businesses carrying large unrelieved main pool balances or buying second-hand assets that do not qualify for the FYA are likely to feel the effect of the lower WDA most.
Why does this make capital allowances more complicated?
As the FYA began in January 2026, followed by the reduction in the main rate of WDA in April, the timing of expenditure has become increasingly critical. With further rate changes due in January and April 2027, this will remain the case for some time.
The changes are being introduced on various dates, which means businesses may have investment subject to different rules and rates, making accurate record keeping essential.
Where an accounting period straddles one of these dates, a hybrid WDA rate may need to be calculated for that period.
Instead of claiming 14 per cent WDA on the full cost of an asset, businesses must first calculate a 40 per cent FYA and then transfer the remaining 60 per cent into the main pool for ongoing WDAs.
Businesses may also need to consider which relief is the most beneficial for the expenditure.
The Annual Investment Allowance (AIA) permits relief of 100 per cent for up to £1 million of expenditure per year.
In addition, companies can claim full expensing on qualifying new main-rate plant and machinery, which may allow a business to deduct the full cost from taxable profits.
However, if spending exceeds the AIA or falls outside full expensing, the relief claimed can have significant implications for a tax bill.
Time to review your tax strategy
It is important for businesses considering major purchases to review the timing of each purchase, as well as how each asset is owned and classified, to assess which relief delivers the best result.
