Entity Setup
Entity Setup: How UK Capital Allowances and First-Year Allowance Changes Affect New Businesses
For companies starting up in the UK, recent Budget 2025 legislation introduces a 40% First-Year Allowance and reduces writing-down allowances—altering depreciation planning and investment decisions significantly.
By NomadicTax Research Team • 6-8 min read • April 8, 2026
## Key Tax Changes for Entity Setup & Capital Investment
The UK’s Budget 2025 introduced a **new 40% First-Year Allowance (FYA)** for qualifying expenditure incurred on or after **1 January 2026**, giving businesses more immediate upfront deductions. ([gov.uk](https://www.gov.uk/government/publications/budget-2025-overview-of-tax-legislation-and-rates-ootlar/budget-2025-overview-of-tax-legislation-and-rates-ootlar?utm_source=openai)) At the same time, the **main rate Writing-Down Allowance (WDA)** is being reduced to **14% from 1 April 2026** for Corporation Tax, and from **6 April 2026** for Income Tax. ([gov.uk](https://www.gov.uk/government/publications/budget-2025-overview-of-tax-legislation-and-rates-ootlar/budget-2025-overview-of-tax-legislation-and-rates-ootlar?utm_source=openai))
## Implications for New Businesses & Systems
These changes mean that businesses planning in 2026 should review capital expenditure forecasts, cash flow, and tax depreciation schedules:
- Assets acquired after 1 January 2026 may benefit from the 40% immediate allowance if eligible—this accelerates tax relief.
- Assets not qualifying for the FYA will instead depreciate via the new 14% WDA, slowing relief considerably compared to current rates.
- Businesses should prioritize purchasing and deploying qualifying assets earlier in the year to take advantage of the FYA rather than being caught with only the WDA.
## What Qualifies & What Doesn’t
Eligible expenditure generally includes plant & machinery, and certain main rate assets used in business operations. Meanwhile, assets that fall under special categories (e.g. short life assets, integral features) may follow different rules. Software may or may not qualify depending on usage and classification. Consult the guidance carefully.
## Planning Strategies for Startup & Scaleup Businesses
- **Timing matters:** Acquire qualifying plant & machinery after 1 January 2026 to benefit from full or partial FYA. If not eligible, aim acquisitions just before that date under the old regime if feasible.
- **Structure purchases:** Bundle eligible assets into classes which are more likely to benefit, separating those that won’t.
- **Cash flow modeling:** Earlier relief via FYA improves cash flow more than slower relief via WDA—use sensitivity analysis to weigh trade-offs.
- **Budget for depreciation transition:** Assets held and used before and after the rate change may require special apportionment rules. Check in guidance from HMRC.
## Example Scenario
AlphaTech Ltd, a new engineering startup, plans to purchase £1 million plant & machinery during FY 2026-27. If the items qualify for the FYA, they can claim **£400,000** (40%) immediately. The remaining £600,000 will be written down at 14% per year rather than higher previous rates. If AlphaTech delayed until mid-2026 but still got assets, they need to consider whether the benefit of FYA outweighs potential financing or delivery constraints.
## Summary
The upcoming changes to capital allowances mark a shift toward front-loaded relief for eligible assets, but slower benefit for others. Businesses setting up now or scaling should revise investment plans, ensure assets qualify for FYA, and align purchases with the calendar to make the most of reliefs. Comparing cash flow under old vs new regimes will pay dividends.