Tax Planning
Capital Allowance Shake-Up: How the New First-Year Allowance and Lower WDAs Will Affect Business Investment
Budget 2025 introduces a 40% first-year allowance and reduces the main rate of writing-down allowances to 14%—a major change for businesses investing in plant & machinery as of 2026.
By NomadicTax Research Team • 5-8 min read • March 24, 2026
## What Are the Changes?
- A **new 40% First-Year Allowance (FYA)** has been introduced for main-rate plant and machinery assets, effective from **1 January 2026**, including for unincorporated businesses and those buying assets for leasing. Second-hand assets, cars, and overseas leasing are excluded. ([gov.uk](https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today?utm_source=openai))
- The **main rate Writing-Down Allowance (WDA)** will fall from **18% to 14%**: for Corporation Tax purposes from **1 April 2026**; for Income Tax purposes from **6 April 2026**. ([assets.publishing.service.gov.uk](https://assets.publishing.service.gov.uk/media/6926e0849c1eda2cdf034098/Budget_2025_policy_costings_-_revised.pdf?utm_source=openai))
## Who Wins and Who Needs to Rethink
- Businesses with **large upfront investments** in new qualifying plant & machinery assets will benefit substantially from the FYA, lowering tax bills in the first year.
- Those who frequently buy second-hand machinery or use cars will gain less: these assets **excluded** from FYA.
- For assets under long depreciation periods, reducing WDA means smaller tax relief spread over a longer time—timing matters.
## Strategic Tax Planning Moves
- Accelerate purchases of eligible new assets into early 2026 to maximise relief under the 40% FYA rule.
- If possible, avoid second-hand purchases if you want full first-year tax relief.
- Compare options: does leasing, hiring, or purchasing new equipment make more sense under the new rules?
- Review cash flow projections: lower WDAs mean less deferred tax relief in future years.
## Practical Example
Two hypothetical scenarios:
1. **Tech Startup A** buys £200,000 worth of new main-rate plant and machinery on 15 February 2026. Under the FYA, they can claim **40% (£80,000)** as allowance immediately, with the rest subject to reduced WDA.
2. **Manufacturing SME B** purchases £150,000 second-hand equipment. They **cannot use FYA** for this, so relief is claimed via WDA at **14%** rate, spread over multiple years.
## Caveats and Considerations
- First-Year Allowance only applies to **new eligible assets** and is permanent only for main-rate assets (excluding cars etc.).
- The reduced WDA may dampen the benefit of gradual capital allowances—if your assets are not used heavily, the slower relief might strain cash flow.
- Always check if equipment qualifies for main-rate vs special rate classification.
## Takeaway Summary
The Budget 2025 capital allowances changes offer **immediate upfront relief** for many businesses, but also make longer depreciation periods costlier than before. To maximise benefit, plan asset purchases carefully, accelerate qualifying spend, and be wary of purchasing ineligible assets if you want fast relief. Businesses standing still will likely experience a shift in when tax relief hits—the sooner you're ready, the better.