Capital Allowances 2026: 40% First-Year Allowance and WDA Changes Explained

40% First-Year Allowance and WDA Reduction from 2026: What Businesses Need to Know

From 2026, major changes to UK capital allowances will impact how businesses claim tax relief on plant and machinery. The introduction of a new 40% First-Year Allowance (FYA) and the reduction in Writing Down Allowances (WDAs) means businesses must plan capital spending carefully to maximise tax efficiency.

What Is the New 40% First-Year Allowance?

The government will introduce a 40% First-Year Allowance (FYA) for qualifying new main rate assets, excluding cars. This allowance provides an upfront tax deduction in the year of purchase.

• Corporation tax: available from 1 January 2026

• Income tax: available from 6 January 2026

Both companies and unincorporated businesses can benefit from this new allowance.

Reduction in Writing Down Allowances from April 2026

From:

• 1 April 2026 for corporation tax, and

• 6 April 2026 for income tax,

the main rate Writing Down Allowance will reduce from 18% to 14%. This change means businesses will recover the cost of assets more slowly over time.

Where an accounting period spans the date of change, a hybrid WDA rate will apply based on the number of days before and after the change.

How Companies Can Claim Capital Allowances in 2026

Annual Investment Allowance (AIA)

The Annual Investment Allowance continues to offer 100% tax relief on qualifying expenditure for both new and used assets, subject to an annual cap of £1 million.

Full Expensing

Companies can also claim full expensing, which allows unlimited 100% relief on qualifying new main rate assets. Because full expensing has no financial limit, the new 40% FYA will mainly apply where full expensing is not available, such as assets used for leasing.

Capital Allowances for Unincorporated Businesses

Unincorporated businesses do not qualify for full expensing, making the 40% FYA particularly valuable.

• Under the cash basis, most capital expenditure is deducted immediately, except for restricted items like cars.

• Where the accruals basis is used, capital allowances apply. Businesses can claim the AIA, and once this is fully utilised, the 40% FYA offers additional relief.

Any remaining expenditure after claiming the 40% FYA will be written off using main rate WDAs.

Impact of Lower WDA Rates on Businesses

The reduction in the WDA rate from 18% to 14% will increase the time it takes to obtain full tax relief. This will affect businesses that:

• Choose not to claim AIA or full expensing

• Claim the new 40% FYA on qualifying assets

How the Changes Affect Cars

• Cars (except new zero-emission cars) do not qualify for First-Year Allowances

• Low-emission cars are allocated to the main pool

With the reduced WDA rate, businesses will now take longer to fully claim tax relief on the cost of these vehicles.

Hybrid WDA Rates Explained

If an accounting period spans the date of the WDA change, a hybrid rate will apply.

Example:
A company preparing accounts to 30 June 2026 will use a blended WDA rate of 17%, reflecting both the old and new rates.

Final Thoughts: Planning for Capital Allowances in 2026

The introduction of the 40% First-Year Allowance alongside reduced Writing Down Allowances represents a significant shift in capital allowance planning. Businesses should review their investment strategy early to ensure they claim relief in the most tax-efficient way.

Professional advice can help maximise relief and avoid missed opportunities under the new rules.

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