Tax Planning
Maximising the New First-Year Allowance: Tax Planning for UK Businesses
With the 40% first-year allowance now in force from 1 January 2026, UK businesses must adjust investment planning to take full advantage – here’s how it works, who qualifies, and what to watch out for.
By NomadicTax Research Team • 5-8 min read • February 24, 2026
## 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](https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today?utm_source=openai))
## 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](https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today?utm_source=openai))
- Covers **both companies and unincorporated businesses**, enhancing benefit for smaller concerns. ([gov.uk](https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today?utm_source=openai))
- Full expensing remains in place for some assets — FYA is an additional route. Businesses must choose the most advantageous. ([gov.uk](https://www.gov.uk/government/news/business-investment-boosted-with-new-tax-relief-taking-effect-today?utm_source=openai))
## Actionable Tax Planning Tips
1. **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.
2. **Asset classification check**: Ensure proposed purchases qualify as “main-rate” assets. Mis-classification to special-rate or excluded categories reduces or denies allowance.
3. **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.
4. **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.
5. **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.