Understanding the new investment incentives
The government’s new 40% First Year Allowance (FYA) has now taken effect. This measure was first announced at Autumn Budget 2025 and is intended to stimulate business investment. It applies to qualifying main‑rate plant and machinery expenditure incurred on or after 1 January 2026. Because capital allowances influence long‑term planning, these changes represent an important update for businesses of all sizes. Moreover, they will shape decisions around equipment upgrades and expansion projects.
How the first new year allowance works
The New First Year Allowance allows businesses to claim 40% relief on qualifying main‑rate plant and machinery. This relief applies even to assets acquired for leasing, which previously did not qualify for full expensing. This change therefore broadens the scope of tax‑efficient investment. It also ensures that more businesses can benefit from early‑year deductions. Unincorporated businesses, including sole traders and partnerships, will also benefit because they could not access the previous full expensing regime. This expansion makes the allowance more inclusive and supports investment across a wider range of sectors.
Interaction with wider capital allowance changes
Alongside the New First Year Allowance, the government confirmed reductions to writing‑down allowances. From 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax, the main rate will fall from 18% to 14%. Although this reduction appears restrictive, the enhanced FYA offers earlier tax relief. Consequently, the overall impact may remain positive for businesses that plan their purchases strategically.
How the allowance aligns with full expensing
The new 40% FYA complements the existing full expensing regime rather than replacing it. Full expensing remains available to incorporated businesses. It allows companies to deduct 100% of the cost of qualifying plant and machinery from taxable profits in the year of acquisition. With Corporation Tax at current levels, this delivers tax savings of up to 25p per £1 invested. The FYA therefore provides an additional option for expenditure that does not qualify for full expensing. This flexibility helps businesses balance cash flow needs with longer‑term investment strategies.
Planning future expenditure
Understanding how the new 40% FYA interacts with annual investment allowances and full expensing will be vital. Each business must review its capital programme to identify the most beneficial approach. Although the rules may seem complex, careful planning can maximise relief. Furthermore, the fact that the new FYA is permanent provides welcome certainty. It allows businesses to schedule investment over several years without worrying about withdrawal or sudden changes.
What businesses should do next
Businesses should review upcoming capital projects and determine which assets qualify. They should also model the tax impact of using full expensing versus claiming the 40% FYA. Because each allowance works differently, the best approach may vary by asset type and business structure. Keeping good records and seeking professional advice will help businesses apply the rules correctly.
