The start of 2026 brings a fundamental change to the UK’s capital allowances regime, offering a significant “front-loading” of tax relief for businesses that have historically been excluded from the most generous incentives. From 1 January 2026, a new permanent 40% First-Year Allowance (FYA) for main rate expenditure is now live, specifically targeting unincorporated businesses and the leasing sector.
The Leasing and Unincorporated “Winner”
While incorporated companies have long benefited from “full expensing,” unincorporated firms (such as sole traders and many partnerships) and businesses acquiring assets for leasing were previously restricted. The new 40% FYA addresses this gap, allowing these entities to write off a substantial portion of their investment in qualifying plant and machinery—including vans, computers, and specialist equipment—in the year of purchase. This is particularly beneficial for businesses that have already exhausted their £1 million Annual Investment Allowance (AIA).
The April “WDA Trap”
Strategic timing of investment is now essential. While the 40% FYA provides an immediate boost, the government is simultaneously reducing the main Writing Down Allowance (WDA) rate from 18% to 14%, effective from April 2026 (April 1 for Corporation Tax, April 6 for Income Tax). This reduction means that any investment not qualifying for the FYA will attract relief more slowly over time. For businesses with accounting periods spanning the April 2026 change, a “hybrid” rate will apply, calculated based on the proportion of the year falling before and after the rate cut.
Strategic Investment Advice
Eligible assets for the 40% FYA include new and unused plant and machinery, but specifically exclude cars and second-hand assets. Given the WDA rate reduction in April, businesses should look to accelerate qualifying capital expenditure into the Q1 2026 window where possible. By investing before the April rate cut, you can lock in higher relief rates on your remaining pool balances while potentially securing the 40% first-year uplift for new acquisitions.
Planning a major purchase? Speak to our tax consultants to model the benefits of the 40% FYA and ensure your Q1 spending is tax-optimized