UK Autumn Budget 2025: Capital Allowance Changes from 2026

Created By : Minakshi Arora

The UK Autumn Budget 2025 introduces important changes to the Capital Allowances regime that will apply from 2026. While the Government is introducing a new 40% First-Year Allowance (FYA) to encourage business investment, it is simultaneously reducing the standard Writing-Down Allowance (WDA) for the main pool from 18% to 14%.

For businesses investing in new plant and machinery, the enhanced upfront deduction offers an opportunity to accelerate tax relief. However, businesses with substantial historic capital expenditure may experience slower tax relief on their existing capital allowance pools. As a result, understanding which assets qualify, and when to incur expenditure, will be critical to maximising tax efficiency.

Understanding Capital Allowances:

Capital Allowances enable businesses to claim tax relief on qualifying capital expenditure, such as plant, machinery, equipment, and certain business assets. Instead of deducting these costs as normal business expenses, businesses can claim tax relief through specific tax relief mechanisms that reduce taxable profits.

Over recent years, the UK Government has introduced several incentives, including the Annual Investment Allowance (AIA) and Full Expensing, to encourage business investment. The Autumn Budget 2025 builds on these measures by introducing a new First-Year Allowance while modifying the existing Writing-Down Allowance.

Key Changes Effective from 2026:

1. Writing-Down Allowance Reduced to 14%:

The writing-down allowance on the main pool of plant and machinery is being reduced from 18% to 14% per year. This is the rate at which businesses gradually claim relief on qualifying expenditure over time, on a reducing balance basis. The good news is that the lower rate still allows businesses to eventually claim full relief on their expenditure; it just stretches the timeline out a little further.

2. Introduction of a New 40% First-Year Allowance:

HMRC is introducing a brand-new first-year allowance of 40%. This means businesses can now claim up to 40% of qualifying expenditure upfront, in the very year the cost is incurred. Unlike Full Expensing, this new relief is available not only to companies but also to unincorporated businesses and leasing businesses, making it accessible to a wider range of taxpayers. However, second-hand assets and cars are excluded from this relief and will continue to qualify only under the standard capital allowance rules.

The Special Rate Pool remains unchanged, with the existing 6% Writing-Down Allowance continuing to apply.

Why is the Government Introducing These Changes?

The Government's objective is to encourage businesses to continue investing in productive assets while gradually reducing the long-term fiscal cost of capital allowances.

By providing more generous upfront relief through the new FYA, businesses making fresh investments can recover a substantial portion of their expenditure immediately. At the same time, the reduction in the Writing-Down Allowance moderates the pace at which older expenditure receives tax relief, helping balance the overall cost to the Exchequer.

Which Businesses Will Be Most Affected?

The impact of these changes will vary depending on a business's capital investment profile.

Businesses likely to benefit include:

• Businesses planning significant investment in new plant and machinery from 2026 onwards.
• Manufacturers and industrial businesses.
• Engineering and construction companies.
• Logistics and transport operators.
• Businesses expanding their production or operational capacity.

Businesses that may be adversely affected include:

• Businesses with substantial historic capital expenditure already sitting in the main capital allowance pool.
• Companies relying primarily on Writing-Down Allowances rather than Annual Investment Allowance or Full Expensing.
• Asset-intensive businesses with limited new investment planned in the coming years.

For these businesses, annual tax deductions may reduce, extending the period over which tax relief is received.

Key Dates:

The timing differs slightly between the two changes:

One important exclusion to flag: second-hand assets and cars are not eligible for the new FYA, so businesses investing in either of these will still need to rely on the standard WDA treatment.

Illustration:

Let’s say a company buys £100,000 worth of qualifying plant and machinery in February 2026, and for whatever reason (perhaps its AIA has already been used up elsewhere), it can't claim the AIA on this purchase.

Under the new rules:

• The business could claim the 40% FYA upfront, giving an immediate deduction of £40,000 in year one.
• The remaining £60,000 then moves into the main pool and is written down at the new 14% rate going forward, rather than the old 18%.
• So, in year two, the business would claim 14% of £60,000, which is £8,400, and so on in subsequent years on a reducing balance basis.

Compare this to a business with £100,000 of expenditure already sitting in its main pool from, say, 2023, before the new FYA existed. That expenditure doesn't qualify for the new 40% allowance since it wasn't incurred in the relevant window. It simply continues being written down, but now at 14% instead of 18%, meaning the annual deduction shrinks, and the pool takes longer to fully relieve.

 Capital Allowances at a Glance:

How AKM Global Can Help

Capital allowance rules look straightforward on paper but often become complex once a business has a mix of historic pools, new investments, leased assets, and different entity types. The interaction between the Annual Investment Allowance (AIA), Full Expensing, the new First-Year Allowance, and the revised Writing-Down Allowance can significantly affect the amount and timing of tax relief available to your business.

AKM Global's UK tax specialists assist businesses by:

• Reviewing existing capital allowance pools to assess the impact of the reduced WDA.
• Advising on the optimal timing of capital expenditure to maximise available tax relief.
• Identifying the most beneficial claim strategy where multiple reliefs may apply.
• Assessing asset eligibility and highlighting exclusions before investments are made.
• Preparing and supporting capital allowance claims in accordance with HMRC requirements and applicable legislation.

In short, 2026 brings a bit of good news and a bit of a trade-off. Businesses making fresh investments stand to gain from faster, more generous relief through the new 40% First-Year Allowance. Businesses sitting on older, unclaimed expenditure will see relief trickle in a little more slowly under the reduced 14% Writing-Down Allowance. Neither change is dramatic on its own, but together they can shift the numbers meaningfully, especially for businesses with large or mixed asset pools.

The smartest move is to look at your own capital expenditure position before April 2026 and analyse where you stand. A short conversation now, about what you've already spent and what you're planning to spend, could make a real difference to how much tax relief you capture and when.

If you would like to understand how these changes may affect your business, reach out to us at info@akmglobal.in or write your enquiry here.