Tax Planning
How Self-Employed and Small Businesses Should Leverage the New 40% First-Year Allowance
Understanding and using the 40% First-Year Allowance (FYA) can dramatically improve cash flow and tax efficiency for small businesses investing in plant & machinery starting in 2026.
By NomadicTax Research Team • 5-8 min read • February 28, 2026
## What is the 40% First-Year Allowance?
From **1 January 2026**, the UK government introduced a **40% First-Year Allowance** (FYA) for qualifying main-rate plant and machinery expenditure, while at the same time the **writing-down allowance (WDA)** rate on main-rate assets drops from **18% to 14%**. These changes will affect taxation under both Corporation Tax (from 1 April 2026) and Income Tax (from 6 April 2026) depending on business type. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai))
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## Who Benefits Most?
- **Unincorporated businesses** – self-employed, sole traders or partnerships often excluded from other FYAs or full expensing schemes now get access to accelerated relief. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai))
- **Leasing providers** – those leasing out plant and machinery can also benefit, though certain exclusions (like overseas leasing) still apply. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai))
- **Small to medium enterprises (SMEs)** investing in new, unused main-rate assets where full expensing or Annual Investment Allowance (AIA) aren’t options. All such expenditure must be new (not second-hand) and unused. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai))
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## Excluded and Key Conditions
| Exclusion | Detail |
|---|---|
| **Second-hand assets** | Not eligible for the 40% FYA. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai)) |
| **Cars and special-rate expenditure** | Excluded from the FYA. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai)) |
| **Overseas leasing** | Generally excluded unless conditions met. ([gov.uk](https://www.gov.uk/government/publications/new-first-year-allowance-and-main-rate-of-writing-down-allowances/capital-allowances-new-first-year-allowance-and-reducing-main-rate-writing-down-allowances?utm_source=openai)) |
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## Practical Examples
- A sole trader buys **new manufacturing equipment** for £100,000 in February 2026. Instead of writing it down gradually, they can claim **£40,000 relief immediately** (40% FYA), reducing their taxable profits for 2025-26 significantly.
- For a limited company purchasing qualifying equipment at £200,000 in June 2026, they can similarly claim 40% FYA under Corporation Tax rules; remaining £120,000 falls under the 14% WDA rate from 1 April 2026 onwards. The WDA for the remainder is accelerated but slower.
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## Tips to Maximise Advantage
- **Plan timing**: Expenditure must be incurred **on or after 1 January 2026** for 40% FYA; earlier it doesn’t qualify. ([gov.uk](https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23195a?utm_source=openai))
- **Check whether other reliefs apply**: AIA or full expensing may provide greater benefit for some assets. Use the best option.
- **Review asset condition**: Ensure assets are new, unused; avoid second-hand or “used for leasing overseas” if excluded.
- **Align accounting periods**: For companies with chargeable periods straddling 1 April 2026, a hybrid WDA rate applies based on pre- and post-change dates.
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## Common Pitfalls and Compliance
- Claiming FYA for excluded assets (e.g. second-hand or cars) could trigger HMRC queries or disallowed deductions.
- Ensuring correct record-keeping: the asset’s cost, date incurred, usage purpose must be documented.
- Software and tax return updates: accounting packages need configuration to allow new FYA and new WDA rates.
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## Action Checklist for Early 2026
- List assets you may purchase (plant & machinery) before or after key dates.
- Speak to tax advisors to model cash-flow benefit vs long-run relief.
- Confirm with your software provider that capital allowance templates are updated.
- If leasing equipment, assess whether your lease structure qualifies under exclusions.
**Bottom line**: the 40% FYA and reduced WDA rate offer significant opportunity for timely investment. If you qualify, using the FYA carefully can unlock tax savings and enhance reinvestment potential.