Capital allowances provide incentives for investment in eligible expenditure, generally plant and machinery, by providing an effective method for businesses to reduce their tax bills.
These reliefs are frequently adjusted and the 2026/2027 tax year will see this tradition continued as two key reliefs are being adjusted by the Government – Writing Down Allowance (WDA) and a new First-Year Allowance (FYA).
How is the Writing Down Allowance changing?
The WDA has now been reduced from 18 per cent to 14 per cent on the main pool of qualifying plant and machinery assets.
The changes were introduced on two different dates, but both have now passed and so it is fully in effect – companies subject to Corporation Tax faced the change on 1 April, while those subject to Income Tax were impacted on 6 April.
It is the businesses with large brought forward main pool expenditures that are expected to be most affected by the reduction in the main rate of WDA.
Over time, the change may make it less appealing to invest in second-hand assets and cars, which benefited more under the previous rules.
What is the new First-Year Allowance?
The impact of the reduced WDA will be softened by a new 40 per cent FYA on main rate expenditure, primarily still covering plant and machinery.
By establishing a new FYA, there is a hope that investment will be encouraged in areas where other FYAs do not typically allow such as with assets bought by unincorporated businesses and leases.
For the first time, sole traders and partnerships will be able to get additional support at the point of investment, which should mean that more businesses face a reduction in their tax bill the same year as their investment.
Some of those affected will benefit from a quick cash flow boost that could pave the way for future investments.
However, you should be aware that this FYA does not support investment in second-hand assets, cars, or leased assets in other countries.
Small business owners will continue to benefit from tax relief on electric vehicles, which could be particularly useful given the current issues with petrol prices.
The 100 per cent FYA for zero-emission vehicles and charge points has been extended until 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax.
Now, businesses can continue to make plans with greater certainty as there will be a strong financial incentive to encourage investment by reducing upfront tax bills.
Our team can help you to understand the changes to capital allowances so that you can know whether you are eligible and what tax relief may be available to you.
Our team can help review the current capital allowances that your business can claim, so please get in touch.
