The Government has announced changes to the capital allowances regime, following previous consultations on the extension of full expensing to leasing companies, that will affect many businesses, both companies and unincorporated entities (for example, sole traders and partnerships), from 2026.

In summary, there is the introduction of a new 40% first‑year allowance (FYA) for certain assets (attractive to lessors of new plant and machinery, for example), but also a reduction to the rate of the standard writing-down allowance (WDA). There has also been an extension to the 100% FYA available on qualifying zero-emission cars and electric vehicle charge points.

The detail

From 1 January 2026, a new 40% FYA will be introduced for qualifying main‑rate plant and machinery expenditure that does not already qualify for full expensing or other FYAs. Importantly, this new FYA will also be available to unincorporated businesses and extend to assets purchased for leasing - both of which are excluded from first‑year relief under full expensing. The relief, however, will only be available on assets  leased to UK companies and excludes cars and second hand-assets.

From 1 April 2026 (for companies), and 6 April 2026 (for sole traders/partnerships), the standard WDA for main‑rate assets will be cut, reducing the annual WDA rate from 18% down to 14%.

The existing enhancements, being the 100% full expensing allowance for qualifying new plant and machinery and the £1 million Annual Investment Allowance (AIA) threshold, continue.

The WDA for the special‑rate pool (i.e. certain long‑life assets, high‑emission cars) remains at the existing 6% rate.

The extension to the FYAs available on qualifying zero-emission cars and electric vehicle charge-points has been extended to 31 March 2027 for corporation tax and 5 April 2027 for income tax (e.g. unincorporated business and sole traders).

The practical aspects

For many, especially companies that already benefit from full expensing, or businesses investing within the £1 million AIA limit, the impact of these changes may be minimal. The new 40% FYA offers an additional route to accelerated relief for unincorporated businesses, leasing firms, or those purchasing assets not covered by full expensing.

However, for businesses holding historical capital‑allowance pools (i.e., older plant and machinery where upfront relief was not claimed) or for those using second‑hand assets (or assets not previously eligible for FYA – such as assets purchased for leasing before 1 January 2026), the shift from 18% to 14% WDA will reduce the rate at which tax relief is obtained.

For those planning capital expenditure, particularly sole traders, partnerships or leasing businesses, there may be an advantage in considering the timing of investments, for example, waiting until January 2026 to benefit from the new 40% FYA rather than relying on slower WDAs. Overall, the tax relief will be the same, but the acceleration of the tax relief may be beneficial.

Next steps

To ensure continuity in business planning and forecasting, we would recommend that the following steps are taken:

• Review any planned capital expenditure projects. For unincorporated businesses or leasing‑type models, the new 40% FYA could offer accelerated tax relief on qualifying assets.
• Revisit forecasts and cash‑flow models, for example, where you are relying on writing‑down allowances (WDAs) for tax relief on older or second‑hand assets, slower 14% WDAs may change the timing and profile of your tax deductions.
• Consider the extension to the availability of FYAs on electric cars and electric vehicle charging infrastructure, where company vehicles are being purchased.
• Consider capital expenditure timing carefully as small details (e.g. asset purchase date) may significantly impact what reliefs are available.
• Consider the classification of your assets as to whether they will qualify for full expensing, new FYAs, AIA or only WDAs.

Get in touch

If you would like to discuss the impact of these changes for you and what you should do next, please don't hesitate to contact me at chris.forgan@jcca.co.uk, your usual JC contact, or our Construction & Property Incentives team.