Businesses planning investment in equipment or machinery in 2026 face several tax changes taking effect at the start of the new tax year, this April. Adjustments to the capital allowance regime will alter how quickly companies obtain tax relief for plant and machinery expenditure.
The government has introduced a new 40% First-Year Allowance (FYA) for certain qualifying assets. At the same time, the rate of relief available through the standard writing-down allowance will fall from April 2026.
Taken together, the changes place greater emphasis on upfront investment relief rather than gradual tax deductions over time. Businesses that rely on the standard capital allowance pool may therefore see slower tax relief unless they claim available first-year allowances or the Annual Investment Allowance.
The changes form part of the government’s broader policy of encouraging investment through upfront tax relief rather than long-term depreciation allowances.
Writing-down allowance reduced from April 2026
From 1 April 2026 for corporation tax and 6 April 2026 for sole traders and partnerships, the main rate writing-down allowance for plant and machinery will fall from 18% to 14% per year
The writing-down allowance applies to expenditure that enters the main capital allowance pool, which generally includes plant and machinery spending that is not covered by the Annual Investment Allowance or other first-year reliefs.
Relief is given on a reducing balance basis, meaning the allowance is calculated each year on the remaining tax value of the pool rather than the original cost of the asset.
Reducing the rate from 18% to 14% slows the pace at which expenditure is written off for tax purposes. The difference increases over time because each year’s deduction is calculated on a progressively smaller balance.
For example, an item of plant costing £100,000 that enters the main pool currently produces a £18,000 deduction in the first year. Under the new rate the first-year deduction would fall to £14,000, with the remaining balance carried forward for relief in later years.
Businesses with significant ongoing equipment expenditure may therefore see tax relief spread over a longer period where assets fall into the main pool.
New 40% First-Year Allowance introduced
Alongside the reduction in the writing-down allowance rate, the government has introduced a 40% First-Year Allowance for certain qualifying plant and machinery expenditure.
The allowance enables businesses to deduct 40% of qualifying expenditure in the year the investment is made, with the remaining balance entering the relevant capital allowance pool for relief in future years.
The measure is intended to accelerate tax relief for expenditure that does not qualify for full expensing or where businesses have already used their Annual Investment Allowance.
In practice, the allowance is likely to be relevant where:
- annual investment exceeds the £1 million Annual Investment Allowance limit,
- the expenditure falls outside the scope of full expensing for companies, or
- business structures such as partnerships or sole traders cannot access corporate-only reliefs.
The relief therefore expands the range of circumstances in which businesses can obtain partial upfront tax deductions for capital expenditure.
How the capital allowance system now operates
Businesses investing in plant and machinery now operate within a system that offers several forms of immediate or accelerated tax relief.
- The Annual Investment Allowance (AIA) provides 100% relief on qualifying expenditure up to £1 million per year.
- Full expensing allows companies to claim 100% relief on certain new plant and machinery.
- The new 40% First-Year Allowance provides accelerated relief where the other allowances are not available.
Where expenditure does not qualify for any of these reliefs, it enters the main capital allowance pool, where the reduced 14% writing-down allowance will apply from April 2026.
The allowance applies to certain new plant and machinery, rather than second-hand assets.
The practical outcome is that businesses will increasingly obtain faster tax relief by claiming upfront allowances, while expenditure falling into the main pool will be relieved more gradually.
Planning considerations for businesses
For many SMEs, the practical impact of the changes will depend on the level and timing of capital investment.
Businesses whose annual expenditure remains within the £1 million Annual Investment Allowance limit will often continue to obtain full immediate tax relief on plant and machinery purchases.
However, companies with larger capital investment programmes may see more expenditure entering the main capital allowance pool once the AIA limit has been used. From April 2026, the reduced writing-down allowance means relief for that expenditure will be obtained more slowly.
In practice, businesses planning significant equipment purchases may review:
- whether expenditure can be covered by the Annual Investment Allowance,
- whether assets qualify for full expensing or the new first-year allowance, and
- the timing of major purchases across tax years.
These considerations are particularly relevant for businesses in equipment-intensive sectors such as manufacturing, construction and logistics, where plant and machinery investment forms a substantial part of annual expenditure.
As the 2026–27 tax year approaches, advisers expect many businesses to revisit capital expenditure plans to ensure they are making full use of available investment reliefs under the revised capital allowance rules.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
