New 40% First-Year Allowance and Reduction in Writing Down Allowances
A new 40% first-year allowance (FYA) is to be introduced from April 2026. It will apply to main rate expenditure on new assets, excluding cars. Both companies and unincorporated businesses will be able to benefit. The new allowance will be available from 1 January 2026 for corporation tax and from 6 January 2026 for income tax.
From 1 April 2026 for corporation tax and 6 April 2026 for income tax, the main rate of writing down allowance (WDA) is reduced from 18% to 14%. A hybrid rate will apply where the chargeable period spans the date of the rate change.
Utilising the new allowance
Companies have a range of options for relieving main rate expenditure in the year in which it is incurred. The annual investment allowance (AIA) provides immediate relief for qualifying expenditure on new and used assets and is subject to an annual limit of £1 million. Companies can also take advantage of full expensing to deduct qualifying expenditure on new main rate assets without limit.
Like full expensing, the new 40% FYA applies to qualifying expenditure on new main rate assets. As full expensing can be used without limit, the 40% FYA will only be of use to a company where the expenditure is outside full expensing — for example, for assets used for leasing.
The new 40% FYA is also available to unincorporated businesses. Where the 40% FYA is claimed, the balance of the expenditure is relieved by main rate WDAs.
Reduction in the WDA
The rate of WDA on main rate expenditure drops from 18% to 14% from 1 or 6 April 2026. This will lengthen the period over which relief is given for expenditure on main rate assets.
Cars, other than new zero emission cars, are not eligible for any of the FYAs. Low emission cars are allocated to the main pool. The reduction in the main rate WDA will mean that it will take businesses longer to fully relieve the cost of main rate cars.
Where the chargeable period spans the date on which the rate changes, a hybrid rate will apply. For example, where a company prepares accounts to 30 June, the hybrid rate for the period to 30 June 2026 is 17%.
Need advice on this topic? Get in touch with Severn Accounting — we serve businesses across Worcester and Birmingham.