The New 40% First Year Allowance Explained

The 40% first year allowance is a new permanent relief on qualifying new and unused main rate plant and machinery, available for spending from 1 January 2026. It gives an immediate 40% deduction in year one, sitting below full expensing at 100% and the £1 million annual investment allowance at 100%, but well ahead of the main rate writing down allowance, which falls from 18% to 14% from April 2026. It is open to all businesses, not only companies.

Announced at the Autumn Budget 2025, the 40% first year allowance is a fresh addition to the UK capital allowances system. It rewards businesses that buy brand new equipment by letting them write off 40% of the cost against taxable profits in the year they buy it, rather than spreading the relief slowly over many years. This guide explains the rate, the start date, who qualifies and how the new allowance fits alongside the reliefs you may already use.

What is the 40% first year allowance?

A first year allowance lets you claim a fixed percentage of qualifying capital spending in the accounting period the spending happens. The new measure sets that percentage at 40% for main rate plant and machinery. So on £100,000 of qualifying equipment you would deduct £40,000 from profits straight away. The rate is permanent, so it is a settled part of the tax system rather than a temporary boost, and it applies to spending incurred on or after 1 January 2026.

The remaining 60% of the cost is not lost. It goes into your main pool and attracts writing down allowances in future years, so over time you still get relief on the full amount. The 40% allowance simply front loads a large chunk of that relief into year one, which helps cash flow.

Who can claim the 40% first year allowance?

The relief is available to all businesses, not only incorporated ones. That includes companies within the charge to Corporation Tax, as well as self employed sole traders and partnerships paying Income Tax. This is a wider scope than full expensing, which is open to companies only, and it is one reason the new allowance matters for so many buyers. If you are weighing up the right structure for your business, our guide on sole trader versus limited company sets out the wider tax picture.

What assets qualify?

The 40% rate applies to new and unused main rate plant and machinery. Main rate items are the everyday assets that sit in the general pool, such as machines, tools, computer equipment, commercial vehicles and most office fit out. Three important exclusions apply:

• Second hand and used assets are outside the relief. The equipment must be new and unused.
• Cars are excluded from the new allowance.
• There is a specific exclusion for overseas leasing.

One notable feature is that the allowance reaches spending that other reliefs do not, including plant and machinery bought for leasing to others. The leasing sector has been outside full expensing, so the 40% rate gives leasing businesses a meaningful new benefit.

How does it compare with full expensing and the annual investment allowance?

The new allowance is designed to fill a gap rather than replace what you already have. For most businesses buying new main rate equipment, two reliefs still come first:

• Full expensing gives companies a 100% deduction on new and unused main rate plant and machinery, with no upper limit.
• The annual investment allowance gives all businesses a 100% deduction on up to £1 million of qualifying spending each year, covering both new and second hand items.

The 40% first year allowance steps in where these do not, or where a business chooses not to use them. In practice that means spending by unincorporated businesses above their £1 million annual investment allowance, equipment bought for leasing, and other cases where full expensing is unavailable or not preferred. So a company already claiming full expensing on its new equipment will often keep doing exactly that. The 40% rate is the next best thing when the 100% options run out.

Why is the main rate writing down allowance falling?

Alongside the new allowance, the government is reducing the main rate of writing down allowances from 18% to 14%. This takes effect from 1 April 2026 for businesses within the charge to Corporation Tax and 6 April 2026 for those within Income Tax. Chargeable periods that straddle the change use a blended rate.

This is the trade off at the heart of the reform. Relief on new main rate equipment is pulled forward through the 40% allowance, while the slower relief that applies to the rest of the pool becomes a little slower still. For businesses that keep investing in qualifying new assets each year the front loaded 40% should more than offset the lower ongoing rate. For those with older pools and little new spending, the 14% rate means relief arrives more gradually.

How do you claim it?

You claim the allowance on your tax return for the period in which the qualifying spending is incurred. Companies claim through the Company Tax Return, and unincorporated businesses through Self Assessment. Keep clear records showing the assets are new and unused, the date of purchase and the amount, because the timing of the spending decides which rate applies. Good record keeping also protects you if HM Revenue and Customs ever asks questions about a claim.

If you are unsure how the 40% allowance, full expensing and the annual investment allowance stack up for a particular purchase, it is worth taking advice before you commit, especially for large orders that span the April 2026 rate change. You can read more across our accountancy and tax guide.

A Solar Protect tax investigation insurance policy covers up to £100,000 of your accountant’s fees with no excess if HM Revenue and Customs opens an enquiry into your capital allowances or anything else on your return. Get a quote.

Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.