What’s New: First-Year Allowance (FYA) 40%
As of 1 January 2026, UK businesses can claim a 40% first-year allowance on main-rate plant and machinery. This extends generous upfront relief to types of assets and entities (including unincorporated businesses and leased assets) that were not always eligible for full expensing previously. This change works alongside a reduction in the main rate writing-down allowance from 18% to 14% starting in April 2026. (gov.uk)
How It Works: Eligibility & Scope
- Applicable to main-rate plant and machinery — e.g., industrial machinery, commercial vehicles (if not special-rate), large equipment used in premises. Not eligible: second-hand assets in some cases, assets for overseas leasing unless meeting conditions. (gov.uk)
- Covers both companies and unincorporated businesses, enhancing benefit for smaller concerns. (gov.uk)
- Full expensing remains in place for some assets — FYA is an additional route. Businesses must choose the most advantageous. (gov.uk)
Actionable Tax Planning Tips
- Review your capex pipeline: If you were already planning major purchases of machinery or plant in 2026/27 or 2027/28, accelerating them to before the deadline improves deduction.
- Asset classification check: Ensure proposed purchases qualify as “main-rate” assets. Mis-classification to special-rate or excluded categories reduces or denies allowance.
- Timing matters: Assets acquired on or after 1 January 2026 are in scope. Avoid delays that might push spending into periods with less generous allowances.
- Unincorporated businesses & leasing: If you're an owner-operator or lease assets for clients, check whether your contracts or ownership define you as the user for tax purposes. Leased-asset rules may change depending on who is treated as holding the asset.
- Integrate with cashflow tools: Upfront allowances lower taxable profits and can reduce cash tax payments; plan cashflow accordingly.
Example
IndustrialCo is a construction firm (company structure). In February 2026, it buys £200,000 of new main-rate plant to be used onsite. Under the 40% FYA, IndustrialCo can immediately deduct £80,000 from taxable profits in that first year. Suppose its taxable profits before allowances are £500,000, and Corporation Tax rate is 25%. That deduction reduces tax payable by £20,000 (25% of £80,000), a substantial benefit compared to using writing-down allowances over several years.
What to Watch Out For / Risks
- Anti-avoidance & rules tightness: Buying assets from related parties or special lease arrangements may invite extra scrutiny. Ensure commercial substance.
- Planning for April 2026 rate drop on writing-down allowance: Assets not eligible or missing FYA timing will fall under lower WA rates—so model scenarios.
- Record keeping & software: Ensure your accounting system can distinguish eligible main-rate assets and track acquisition dates. Errors or misreporting reduce benefit.
- Compatibility with future policy shifts: Though current corporate tax rate remains at 25% for this Parliament, changes may arise—don’t over-commit to long-term capex without flexibility.
Practical Checklist Before You Invest
| Step | Action |
|---|---|
| 1 | Classify planned assets: main-rate vs special/excluded rate |
| 2 | Schedule acquisitions to fall after 1 Jan 2026 |
| 3 | Ensure contracts (especially leases) clearly define usage / ownership |
| 4 | Update accounting / tax software to treat FYA correctly |
| 5 | Consult with tax advisor on blending with existing capital allowances |
By using the 40% FYA for main-rate plant and machinery, many UK businesses can achieve substantial tax savings and improved cashflow. The changes represent a golden opportunity — plan carefully to make them work for you.