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)
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)
- Leasing providers – those leasing out plant and machinery can also benefit, though certain exclusions (like overseas leasing) still apply. (gov.uk)
- 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)
Excluded and Key Conditions
| Exclusion | Detail |
|---|---|
| Second-hand assets | Not eligible for the 40% FYA. (gov.uk) |
| Cars and special-rate expenditure | Excluded from the FYA. (gov.uk) |
| Overseas leasing | Generally excluded unless conditions met. (gov.uk) |
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.
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)
- 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.
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.
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.