New 40% First-Year Allowances (FYAs) with a Sting
- Bryan Crawford
- 35 minutes ago
- 4 min read
Today's capital allowances Budget changes might sound like a giveaway with a new 40% First-Year Allowances (FYA) for all businesses (with extensions for leasing) but that 18% to 14% Writing Down Allowance (WDA) reduction for existing 'main rate' plant or machinery (P&M) means that overall HM Treasury is hoping to raise an extra £1bn to £1.5bn annually from 2026/27.
While the 40% FYA benefits a wider population, it is important to note that the existing Annual Investment Allowances (AIA) also benefits a wider population and is likely to have similar leasing claim availability, so this new FYA is primarily aimed at unincorporated and leasing businesses with expenditure in a chargeable period beyond the £1million AIA limit.
This means that if you are not already optimising claims for 100% Annual Investment Allowances (up to £1m) or making the most of 100%/50% FYAs for 'Full Expensing' or claiming your full entitlement on existing 18% WDAs, you may find your business will lose out in tax cash flow from today's announcement.
Key Capital Allowances Budget Announcement
Today's key measures are:
Introduction of a new 40% First-Year Allowance (FYA), available to a broader range of businesses, including unincorporated firms.
A permanent reduction of the main rate Writing-Down Allowance (WDA) from 18% to 14%.
The 100% FYA for zero CO2 emission cars and for the purchase and installation of electric vehicle charge-points by businesses has been extended for a further 12 months
Who Benefits?
Core beneficiaries and eligibility:
All Businesses: The new 40% FYA applies to both Corporation Tax and Income Tax payers. This ensures that all businesses, including unincorporated firms (such as sole traders and partnerships), can benefit from this accelerated allowance for qualifying expenditure.
Relaxation for Leasing: The new allowance explicitly covers plant or machinery for leasing.
Commencement: The new FYA is available for expenditure incurred on or after 1 January 2026.
Exclusions: The allowance applies only to new expenditure on eligible 'main rate' pool assets, specifically excluding 'special rate pool', second-hand assets and cars.
Comparison of 40% First-Year Allowances to Existing
While the 40% FYA benefits a wider population, it is important to note that the Annual Investment Allowances (AIA) also benefits a wider population and is likely to have similar leasing claim availability, so this new FYA is primarily aimed at unincorporated and leasing businesses with expenditure in a chargeable period beyond the £1million AIA limit.
For existing companies with expenditure beyond their AIA entitlement, Full Expensing (FE) is expected to remain the most generous relief where it is available. When neither AIA or FE is available then the new FYA 40% rate may be considered instead.
Of course as the above graph shows, businesses that are entitled to the new FYA allowance who were only able to claim the standard 18% WDAs will see an immediate Yr 1 timing difference but with the main rate getting reduced to 14% others will likely find themselves worse off.
The Sting in the Tail
The positive impact of the new 40% FYA, while beneficial for timing, must be viewed in the context of the reduction in the standard WDA rate, which applies to the general 'main rate' pool of assets.
The main rate of WDA is to be permanently reduced from 18% to 14% from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.
This measure is expected to not only pay for the new 40% FYA but also generate annual net revenue increases to HM Treasury of £1,035 million in 2026-27 and rising to £1,505 million in 2027-28 [Budget Policy Costings 2025 (p.56)].
Planning and Timing Claims
There are often legitimate reasons why businesses do not to claim their full entitlement to allowances whenever the expenditure is incurred (e.g. tax capacity, loss relief planning, pre-trading rules etc.) but today's announcement might change some of those planning assumptions because the relief that might have been assumed to be available at 18% is no longer.
Of course, if tax rates go up in later years, those deferred claims in allowances could prove more valuable (and any balancing charges more costly) and that is the thing with expenditure that qualifies for capital allowances - planning and timing is everything.
Tax Based Leasing Anti-Avoidance
The relaxation of existing anti-avoidance for plant or machinery that is leased (e.g. long-funding lease rules) seems unlikely so what impact the new 40% FYA is going to have on leased assets is going to be limited and we await further details with interest.
Conclusion
For a capital allowances claim to be valid it must be claimed (‘pooled’) in a relevant tax computation. In doing so, businesses will have the choice to claim either a AIA, FYA or WDA on qualifying expenditure where entitled. Businesses do not normally have to claim their full entitlement (special rules for REITS and PAIFs) and can reduce it to nil, if desired.
For capital allowances purposes, only claims for enhanced or accelerated relief (e.g., Annual Investment Allowances, FYAs etc.) come with strict time limits. Provided you still own the qualifying assets (i.e., not demolished, substantially altered, or disposed etc.) claims for WDA can often still be made in later tax years.
Today's announcement means that businesses who defer claims, particularly when they are entitled to higher initial rates of relief are likely to lose out.
If you have any questions on today's budget please do not hesitate to get in touch.