Tax Planning
Unlocking the 40% First-Year Allowance: How UK Businesses Can Benefit Now
With the introduction of a **new 40% permanent first-year allowance** for plant and machinery from 1 January 2026, businesses large and small have a fresh opportunity to accelerate tax relief on new capital investment.
By NomadicTax Research Team • 5-8 min read • February 17, 2026
## What’s Changed
From **1 January 2026**, the UK government introduced a **new 40% first-year allowance (FYA)** for certain qualifying main-rate plant and machinery expenditure. At the same time, the **writing-down allowance (WDA) rate** for the main pool of plant and machinery is being reduced from **18% to 14%**, effective 1 April 2026 for corporation tax and 6 April 2026 for income tax.([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))
### Who is Eligible
This new capital allowances relief is available to:
- Companies subject to corporation tax and unincorporated businesses paying income tax.([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))
- Those purchasing new, unused plant or machinery not excluded as “special-rate” expenditure, and not second-hand. Expenditure on cars is excluded.([gov.uk](https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23195a?utm_source=openai))
- Leasing providers and unincorporated entities who previously weren’t able to access some allowances.([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))
## When It Takes Effect
| Measure | Effective Date |
|---|---|
| 40% first-year allowance for qualifying expenditure | From **1 January 2026** for assets purchased on or after this date.([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)) |
| Reduced WDA rate from 18% → 14% | From **1 April 2026** (corporation tax) / **6 April 2026** (income tax).([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)) |
## Practical Implications & Examples
**Example 1 – Incorporated Business:** A Ltd buys machinery qualifying for main-rate expenditure on 15 February 2026 costing £200,000. Under the new rules, it can claim a 40% first-year allowance (£80,000) in that year; the balance £120,000 remains in the main pool and is now written down at 14%, so first WDA is £16,800.
**Example 2 – Sole Trader or Unincorporated Business:** Jane, a sole trader, purchases qualifying machinery on 20 March 2026. She too can claim the 40% FYA under income tax rules since she is not excluded. The key is ensuring the purchase is new and not second-hand.
## Key Action Steps for Businesses
- Check your plant and machinery assets being purchased **on or after 1 January 2026**: ensure they meet the eligibility criteria.
- Review your accounting software and tax computations ahead of **April 2026** to adjust for the change in the WDA rate.
- For leasing arrangements: determine how leases are structured, since leasing providers may benefit under the new FYA when assets are leased to customers.
- Speak with your tax adviser to model the cashflow effects—accelerating relief now may reduce taxable profits substantially, so ensure you can use the relief (i.e. have sufficient taxable profits) to avoid wasted allowances.
## Risks & Things to Watch
- “Special-rate” plant & machinery (long-lived assets, certain low-carbon assets) are **excluded** for this 40% FYA—it’s not universal.
- If a business doesn’t have enough profit to absorb the increased upfront relief in one year, it may result in losses or reduced corporation tax payable—but wouldn’t generate refunds unless loss claims are available.
- Changes interact with other allowances (Annual Investment Allowance, full expensing). Understanding which allowance gives the greatest net benefit is essential.
## Strategic Opportunities
- Plan capital purchases to fall just on or after 1 January 2026, so qualifying assets can benefit from the FYA rather than being caught by higher WDA percentages pre-change.
- High-investment sectors (construction, manufacturing, logistics) can use this to free up capital for hiring, R&D or debt servicing.
- Firms with major lease portfolios should reconsider whether owning or leasing assets makes the most tax-efficient sense under the new regime.
This change represents a significant shift in investment incentives. By accelerating relief for qualifying assets, the government aims to boost business growth, productivity and capital investment. Done right, the new 40% FYA combined with lower WDA rates offers materially improved tax planning opportunities in 2026.