How capital allowance changes will affect businesses in 2026 

The 2025 Autumn Budget introduced several changes to capital allowances that affect how businesses claim tax relief on investment in equipment and machinery in 2026. These budget changes to capital allowances are designed to encourage investment while reshaping how tax relief is delivered over time.

What are the latest capital allowance changes? 

Two major changes to capital allowances sit at the centre of the government’s policy: 

1. The government is introducing a new 40% First-Year Allowance (FYA) for qualifying plant and machinery
2. The government is reducing the main rate Writing-Down Allowance (WDA) from 18% to 14%. 

For businesses investing in equipment, understanding these capital allowance changes will be the key to planning effectively. 

Breaking down the capital allowance changes 

The recent budget changes to capital allowances represent a shift in how tax relief for business investment is delivered.

Previously, most assets that did not qualify for enhanced relief were claimed gradually through the standard Writing-Down Allowance system. Under the new rules, the government is introducing a 40% First-Year Allowance, allowing businesses to deduct a significant portion of qualifying investment upfront. 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.

At the same time, the government is implementing changes to capital allowances by reducing the main rate WDA from 18% to 14% per year. This means businesses relying on standard relief will receive deductions more slowly.

These changes are designed to encourage earlier investment while rebalancing the overall tax system for business tax capital allowances. 

Assets that are excluded from the new allowance

As with most tax reliefs, there are some assets typically excluded from the new First-Year Allowance:

• Cars
• Second-hand assets
• Assets leased overseas

These items will continue to rely on traditional business tax allowance rules and may therefore be affected by the reduced WDA rate.

Key dates 2026 dates for capital allowances businesses should know

The new rules will be introduced in stages during 2026:

• 1st January, 2026: The new 40% First-Year Allowance becomes available
• 1st April, 2026: The new 14% Writing-Down Allowance rate applies for Corporation Tax
• 6th April, 2026: The 14% WDA rate applies for Income Tax

There is also a transitional rule for businesses whose accounting periods span the implementation dates. In these cases, a hybrid rate will apply (depending on the proportion of the accounting period before and after the change).

How will the 40% First-Year Allowance affect businesses? 

The most significant of the capital allowances changes is the introduction of a 40% First-Year Allowance for qualifying plant and machinery. This means businesses can deduct 40% of the cost of qualifying assets from taxable profits in the first year, rather than claiming relief gradually over time. This is particularly advantageous for businesses that cannot claim full expenses or other first-year allowances. By providing earlier tax relief, the policy aims to improve cash flow and encourage companies to invest in productivity-enhancing equipment.

Who benefits most from these changes to capital allowances? 

Some businesses will benefit more from these changes to capital allowances than others.

Those most likely to benefit include:

• Unincorporated businesses, such as sole traders and partnerships
• Leasing companies purchase assets to lease to customers
• Businesses unable to access full expensing

For these organisations, the new rules may expand opportunities to claim valuable business capital allowances.

How the reduced Writing-Down Allowance affects capital allowances

While the new First-Year Allowance accelerates tax relief for some assets, the reduction in the Writing-Down Allowance has the opposite effect. Under the new capital allowance 2026 rules, the main rate WDA will fall from 18% to 14% per year.

This means that if assets do not qualify for the new allowance (or other enhanced reliefs), businesses will need to claim tax relief more gradually through standard business capital allowances. Businesses that regularly invest in plant and machinery, these capital allowance changes may affect how quickly they recover the tax cost of those investments. As a result, planning becomes increasingly important when considering major capital expenditure.

Why did the government introduce these capital allowances changes?

The government’s aim with these changes to capital allowances is to encourage business investment while adjusting how tax relief is distributed over time. The latest round of changes is designed to: 

• Encourage investment through larger upfront tax relief
• Support businesses that cannot claim full expensing
• Rebalance the capital allowances system, with more relief delivered earlier rather than gradually

For businesses, the message is clear: the structure of business capital allowances is evolving, and tax planning should evolve alongside it.

How Rayner Essex can help businesses navigate capital allowance changes

With multiple capital allowances changes taking effect in 2026, understanding how the rules apply to your business can quickly become complex. Working with experienced tax advisers can help ensure your business makes the most of available business capital allowances while staying compliant with new regulations. At Rayner Essex, we work with organisations across a range of sectors to help them navigate capital allowances and wider tax planning strategies.

Our specialists can help with:

• Identifying assets that qualify for capital allowances 2026 reliefs
• Structuring investment to maximise business capital allowances
• Advising on corporate tax strategy and investment planning
• Integrating capital allowances with wider tax and financial planning

Proactive advice can make a significant difference to your tax position. To discuss how the new rules could affect your organisation and how to maximise available business capital allowances, get in touch.

Photo by Jakub Żerdzicki on Unsplash