Policy paper

Capital allowances: new first-year allowance and reducing main rate writing-down allowances

Published 26 November 2025

Who is likely to be affected

The measure will impact businesses with pools of historic main rate expenditure which pre-date the introduction of the super-deduction or full expensing regimes (companies only), as well as historic expenditure or future main rate expenditure which does not qualify for first-year allowances, or where first-year allowances were not claimed.

The businesses may be within the charge to Income Tax or Corporation Tax.

General description of the measure

The measure reduces the rate of writing-down allowance (WDA) on the main pool of plant and machinery from 18% to 14% per year which still enables full relief for the expenditure.

In addition, it introduces a first-year allowance (FYA) of 40% for main rate expenditure, with reduced restrictions compared to other FYAs, to encourage investment where those FYAs are not available, such as for assets bought for leasing and by unincorporated businesses.

Policy objective

This measure will incentivise and support future business investment in plant and machinery where existing FYAs are not available while reducing the main rate of WDAs. 

By reducing the restrictions inherent in other FYAs, the measure enables unincorporated businesses and leasing providers to benefit from additional support at the point of investment.

Background to the measure

This measure was announced at Budget 2025.

Capital allowances allow businesses to write off the costs of capital assets, such as plant or machinery, against their taxable income. They take the place of commercial depreciation, which is not allowed for tax.

The capital allowances regime for plant and machinery includes both WDAs and a set of varied FYAs at various rates.  The main rate of WDAs applies to all qualifying expenditure other than that specifically categorised as special rate (generally assets with longer economic lives, and high-emission cars).  It has been set at 18% since 2012.

The introduction of permanent full expensing and the £1 million Annual Investment Allowance (AIA) has seen a large proportion of tax relief available through capital allowances for new investment shift from the gradual deductions of WDAs to a full or substantial upfront deduction under FYAs or the AIA.   

The rate reduction to the WDA is introduced in conjunction with a new FYA.  The FYA will be beneficial primarily where the £1 million AIA or existing FYAs (such as full expensing) are unavailable or not preferred.  Unlike full expensing, the new allowance will be available for unincorporated businesses and assets used for leasing.

This measure does not change the WDA on the special rate pool which is currently 6%.

Detailed proposal

Operative date

The new rate of WDA will be effective from:

• 1 April 2026 for businesses within the charge to Corporation Tax
• 6 April 2026 for businesses within the charge to Income Tax

For businesses whose chargeable period spans 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate will have effect.

The hybrid rate will be based on the proportion of a chargeable period falling before the change date and the corresponding proportion falling after the change date.

The new FYA will be available for expenditure incurred from 1 January 2026.

Current law

The current law is found within part 2 of the Capital Allowances Act (CAA) 2001.

The main rate of plant or machinery WDAs is currently 18% per annum on a reducing balance basis.

Proposed revisions

Legislation will be introduced in Finance Bill 2025-26 to adjust the main rate of WDA which will be changed from 18% to 14%.

The legislation will be changed by substituting 18% with 14% in Section 56(1) CAA 2001.

The Finance Bill 2025-26 will also introduce a new permanent FYA, set at 40% applying to certain assets beyond the current availability of full expensing and the AIA.  This provision will encourage new investment, outside existing FYAs, by accelerating relief in the year of investment.

This will enable the leasing sector, which is currently excluded, to benefit from some accelerated relief.  There will be a specific exclusion for overseas leasing.

The relief will be available to all businesses, not just incorporated businesses.

Second hand assets will be specifically excluded from the relief.

Cars will also be excluded from the scope of the new FYA.

Summary of impacts

Exchequer impact (£ million)

2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030	2030 to 2031
+35	+1035	+1505	+1490	+1470	+1450

These figures are set out in Table 4.1 of Budget 2025 and have been certified by the Office of Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2025.

Macroeconomic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will impact only individuals who may be eligible to claim capital allowances. For the self-employed, the impacts are as set out in the ‘administrative impact on business including civil society organisations’ section. Rarely, employees claiming WDAs for certain necessary plant not provided or reimbursed by their employer may be adversely affected by the WDA rate reduction.

The measure is not expected to impact on family formation, stability or breakdown.

This measure is expected overall to have no impact on individuals’ experience of dealing with HMRC as the change does not change any processes or tax administration obligations.

Equalities impacts

This measure may impact a small number of individuals who are self-employed. If a protected group is overrepresented in the self-employed population, then it may be disproportionately impacted by this measure.

Self-employed individuals of typical working age (25 to 64 years old) are estimated to be overrepresented (85%) compared to their prevalence in the overall UK adult population (66%). Males are also estimated to be overrepresented in the self-employed population (62%) compared to their prevalence in the UK adult population (50%) as well as those from an any other White ethnic background (8% vs 5%).

Where data were available no other protected group was estimated to be overrepresented in the self-employed population.

Administrative impact on business including civil society organisations

This measure will have a negligible impact on the administrative burdens of 650,000 businesses (which includes the self-employed) whose qualifying expenditure for capital allowances has not been or will not be covered by a valid claim for Annual Investment Allowance (AIA), super-deduction or full expensing.

One-off costs may include familiarisation with the new rules and updating software to reflect the new rate. It is not expected that there will be any ongoing costs.

Many businesses will not be affected by the decrease in the WDA rate as they will continue to claim for all expenditure in the year in which it is incurred using the AIA or full expensing.

Businesses still claiming WDAs for expenditure incurred in earlier years or who claim WDAs for any expenditure not covered by the AIA, super-deduction or full expensing may be adversely affected by the decrease in the WDA rate. 

Business making future investments where AIA or full expensing cannot or will not apply will be able to claim the new FYA for qualifying expenditure, allowing them to claim accelerated relief in the year of investment

This measure is expected overall to have no impact on businesses’ experience of dealing with HMRC as the change does not change any processes or tax administration obligations.

There is no impact on civil society organisations. There is no impact on ring fence trades.

Operational impact (£ million) (HMRC or other)

The additional costs for HMRC implementing this change are estimated to be £4.4 million.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected on tax returns.

Further advice

If you have any questions about this change, contact HMRC’s capital allowances team by email at contact.capitalallowances@hmrc.gov.uk.