Capital allowances continue to provide an effective method for businesses to reduce their tax bills, by providing incentives for investment in eligible expenditure – typically plant and machinery.
Historically, these reliefs have been subject to change and the 2026/27 tax year is no different, as the Government moves to alter two key reliefs – Writing Down Allowance (WDA) and a new First-Year Allowance (FYA).
Reduction of the Writing Down Allowance
The WDA will be reduced from 18 per cent to 14 per cent on the main pool of qualifying plant and machinery assets.
This change has been introduced on two different dates, starting with companies subject to Corporation Tax on 1 April and followed shortly thereafter by those subject to Income Tax, such as sole traders and partnerships, from 6 April.
Businesses with large brought forward main pool expenditures are expected to lose the most from the reduction in the main rate of WDA.
In the long-term, the change may also reduce incentives for investment in second-hand assets and cars, which benefited under the previous rules.
The new First-Year Allowance
The new 40% First‑Year Allowance (FYA) benefits businesses by accelerating tax relief on qualifying new and unused plant and machinery where other allowances, such as the Annual Investment Allowance (AIA), are not available or have been exhausted.
This new FYA will allow businesses to deduct 40% of the cost to be deducted immediately rather than this expense being spread slowly over several years.
The new FYA will apply to expenditure incurred from 1 January 2026 and could significantly improve cash flow and should soften the impact of the reduction in WDA from 18% to 14% from April 2026.
This is expected to give a quick cashflow boost to those affected and provide additional support for future investments.
However, it is important to note that this FYA does not support investment in second-hand assets, cars or leased assets in other countries.
Finally, the Government has also confirmed that small business owners will continue to benefit from tax relief on electric vehicles, as the 100 per cent FYA for zero-emission vehicles and charge points has been extended until 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.
This gives businesses greater certainty when planning ahead, while also providing a strong financial incentive to invest by reducing tax bills upfront.
Want to make more of capital allowances?
If you think you may be eligible for capital allowances, either due to the changes outlined in this article or more generally, then it is important that you claim the tax relief available to you.
