Rachel Reeves’ Autumn Budget introduced a number of changes for SMEs including to capital allowances which will affect how businesses plan investment in assets from 2026 onwards.
The government has introduced a new 40% first year allowance (FYA) on main rate assets for all businesses from 1 January 2026. On the face of it, this sounds positive, but the reality varies depending on your business structure.
Companies already have access to full expensing which provides a 100% write-off on qualifying expenditure on most plant and machinery (excluding cars) as long as it is new and unused. Similar rules apply to integral features and long life assets at a rate of 50%. Companies also benefit from the £1 million Annual Investment Allowance (AIA), both providing 100% tax relief. The new 40% FYA will only be genuinely useful for companies purchasing assets specifically for leasing, however, cars, second-hand assets and assets for leasing overseas will not be eligible.
For unincorporated businesses such as sole traders and partnerships, the new FYA fills a gap that previously existed. These businesses have not had access to full expensing, so the 40% allowance represents a genuine improvement in available tax relief. Partnerships with corporate partners may also find this particularly beneficial where corporate members cannot utilise the AIA.
Writing Down Allowance
The main rate Writing Down Allowance (WDA) reduces from 18% to 14% per year and effective as follows:
- 1 April 2026 for businesses within the charge to Corporation Tax
- 6 April 2026 for businesses within the charge to Income Tax
For businesses relying on WDA relief on existing pools of expenditure, this is a negative development. Assets purchased before the new FYA was available will continue to benefit from relief only at the reduced 14% rate going forward, meaning slower tax relief overall. The reduction applies to all qualifying expenditure not covered by AIA, full expensing or the new FYA, so the impact is broader than just new investment.
The government has confirmed that the special rate pool WDA remains at 6%, so long life assets and high emission vehicles are not further affected. For businesses with chargeable periods which span 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate will apply based on the proportion of time either side of the transition.
What remains unchanged
The £1 million Annual Investment Allowance (AIA) continues to provide 100% relief, and the 100% FYA for zero emission cars and EV chargepoints has been extended to 31 March 2027 (5 April 2027 for income tax purposes). These points of stability are worth noting, particularly if your business is investing in electric vehicles.
Considerations for businesses
Businesses considering capital expenditure need to think carefully about when to purchase assets. For example, companies planning to purchase equipment for leasing may benefit from waiting until January 2026 to access the new FYA, whereas those relying on existing allowances may want to accelerate purchases before April 2026 to benefit from the higher 18% WDA for longer.
For businesses with chargeable periods straddling the change dates, hybrid rates will apply based on the proportion of time either side of the transition, adding further administrative burden.
Next steps
We recommend reviewing your capital allowances position with your accountant before making material investment decisions. Understanding whether you benefit from the new 40% FYA, how the WDA reduction affects your existing pools, and whether timing your expenditure could optimise your position will be important planning considerations for 2026.
Here at Mitchell Charlesworth we work with SMEs across the North West to navigate these complexities. If you’d like to discuss how the capital allowances changes affect your business and what steps you should consider before making investment decisions, we’d be happy to help. Get in Touch
