UK Introduces New 40% First-Year Capital Allowance to Boost Business Investment

The UK government has introduced a new permanent 40% first-year allowance (FYA) for qualifying plant and machinery, effective 1 January 2026, marking a further step in strengthening the UK’s business and investment environment.

Announced by HM Treasury, the measure is designed to support business growth by allowing companies and unincorporated businesses to claim significant upfront tax relief on capital investment.

Key features of the new relief

Under the new rules:

• Businesses can claim a 40% first-year allowance on qualifying main-rate plant and machinery

• The relief applies to assets acquired for leasing

• Unincorporated businesses, which do not benefit from full expensing, are now included

• The allowance is permanent, providing long-term certainty for investment planning

The new FYA builds on the UK’s existing capital allowances framework, which is already regarded as one of the most generous among OECD countries.

Relationship with full expensing

The new allowance complements the existing full expensing regime, which enables companies to deduct 100% of the cost of qualifying plant and machinery from taxable profits in the year of acquisition. Full expensing remains available for incorporated businesses and continues to offer tax savings of up to 25p for every £1 invested, reflecting the current Corporation Tax rate.

Government’s wider corporate tax strategy

The Chancellor of the Exchequer, Rachel Reeves, emphasised that encouraging business investment is central to driving economic growth and confidence. The government has reiterated its commitment to:

• Capping Corporation Tax at 25% for the remainder of the current Parliament

• Maintaining a stable and competitive corporate tax environment

• Supporting scale-ups and long-term capital investment

As part of a fiscally balanced approach, the government also confirmed that the main rate writing-down allowance (WDA) will be reduced from 18% to 14% from April 2026, as previously announced at Budget 2025.

Practical implications for businesses

This change is particularly relevant for businesses investing in equipment, infrastructure, logistics, manufacturing assets, and other capital-intensive operations. Companies and sole traders should carefully assess how the new 40% FYA interacts with existing allowances and their wider tax position.

Professional advice is recommended to ensure investments are structured efficiently and reliefs are maximised in line with HMRC requirements.

For further background on recent UK tax changes, see our previous article on the Autumn Budget 2024 and key business tax measures: https://www.ccs.law/post/autumn-budget-2024-uk-government-announces-major-tax-measures

CCS Law is closely monitoring developments in the UK’s corporate tax and capital allowances regime and advising UK and international clients on their potential impact. We regularly support businesses on corporate structuring, investment planning, and cross-border matters, and are assisting clients in assessing how recent and upcoming changes may affect their operations, investment decisions, and long-term tax efficiency.

Disclaimer: This article is intended for informational purposes only and does not constitute legal or tax advice.