Richard Jones explores the changes announced to capital allowances at the Autumn Budget 2025, including the introduction of a new 40% first year allowance (FYA) and the reduction in the main rate of writing down allowances (WDA).
At the Autumn Budget 2025, the government announced the introduction of a new 40% FYA from January 2026 with the intention of plugging gaps in the existing framework of accelerated capital allowances, including for the leasing sector. To ensure the new FYA is “introduced in a fiscally sound way”, the government also announced a cut in the main rate of WDA from April 2026. Legislation providing for both measures is included in the Finance Bill 2025-26 (cl28 and 29).
All statutory references in this article are to the Capital Allowances Act 2001 unless specified otherwise.
How the new FYA is given
Where the new 40% FYA is claimed, capital allowances equal to 40% of the expenditure incurred are given in the period for which the claim is made. The remaining amount of the expenditure is taken to the main rate pool with WDA given on a reducing balance basis for subsequent periods.
On the disposal of the asset in respect of which the FYA was claimed, the proceeds received, if any, are to be deducted from the main rate pool. This contrasts with full expensing and the 50% FYA for special rate expenditure where the disposal gives rise to a balancing charge.
Conditions for claiming the new FYA
New section 45U provides that expenditure qualifies for the 40% FYA where:
- It is incurred on or after 1 January 2026. Generally, expenditure is incurred when the obligation to pay becomes unconditional (see CA11800 for an exception to the general rule and for guidance on how to apply the rules in certain circumstances).
- It is not special rate expenditure. The term “special rate expenditure” is defined by s104A and includes expenditure on, among other things, integral features (see CA23210 for guidance).
- It is on plant and machinery (P&M) that is “unused and not second-hand”. HMRC’s guidance on full expensing (CA2317AB) explains how to apply this condition where there has been use for the purposes of testing, delivery or demonstration; where an existing asset has been improved or recycled; and in the case of computer software.
- It is not “incurred directly or indirectly in consequence of, or otherwise in connection with, disqualifying arrangements” (new s45V). Briefly, arrangements entered into with a main purpose of securing a tax advantage connected with the new FYA may be “disqualifying arrangements” depending on the circumstances.
- It does not fall within the general exclusions from FYAs provided for by s46. These include expenditure incurred in the final chargeable period, expenditure on cars and “on the provision of plant and machinery for leasing” (see CA23113 for guidance). However, the general exclusion for leasing is relaxed by Finance Bill 2025-26 for the purposes of the new 40% FYA, as explained below.
Importantly, the new 40% FYA is not restricted to:
- a company, as for full expending; or
- a company, an individual or a partnership of which all the members are individuals, as for the annual investment allowance (AIA).
In other words, the new 40% FYA is available more widely (ie, to sole traders and partnerships, including partnerships with corporate members). Also, unlike the AIA, the new 40% FYA is not subject to an annual cap (£1m for the AIA).
General exclusion for leasing
As noted above, expenditure incurred on P&M for leasing is usually excluded from FYAs. The legislation makes clear that this is the case whether the leasing is “in the course of a trade or otherwise” and that the letting of an asset on hire is to be regarded as leasing for this purpose. HMRC’s guidance (CA23115) makes the distinction between the hiring of an asset, which is generally excluded from FYAs, and “the provision of services that involve the use of an asset”, which is not. HMRC says that, in the construction industry, “plant provided predominantly with an operative is more than mere hire” and so would avoid the exclusion from FYAs for leasing.
In 2024, the exclusion was modified to allow FYAs to be claimed for expenditure on P&M “provided for leasing under an excluded lease of background plant or machinery for a building” (s46(4A)). The intention behind the change was to extend the then 130% super-deduction and 50% special rate FYA to property lessors. Very broadly, the exclusion is switched-off where the P&M is fixed to the building, contributes to its functionality and is leased with the land under a mixed lease (s70R). Examples of P&M that is and is not background P&M for a building are given in a statutory instrument (SI 2007/303) and there is guidance from HMRC at CA23835.
Leasing and the new 40% FYA
The Finance Bill 2025-26 makes further modifications by introducing new s46(4B-4G). For the purposes of the new 40% FYA only, the general exclusion for leasing does not apply where:
- the P&M is for use wholly, or almost wholly, by the lessee for the purpose of earning income that is within the charge to tax; or
- the lessee is resident in the UK and the P&M is not for use to a significant extent by the lessee for the purpose of earning income that is from a non-UK source and is outside the charge to tax.
Where income arises to a person who is entitled to claim relief from the tax chargeable on that income under double taxation arrangements or unilateral relief arrangements, the income is treated as being outside the charge to tax.
Therefore, when considering the new 40% FYA, it may be possible to ignore the exclusion for leasing where the P&M is for use by the lessee in generating income that is taxable in the UK. Although applying the new rules should be clear cut in most cases, there will be circumstances where there is doubt. ICAEW understands that HMRC will publish guidance on the new rules shortly.
Reduction in the rate of WDA
In its corporation tax roadmap, published in October 2024, the government said that it recognised the case for extending full expensing to leasing and that it would “explore making this change when fiscal conditions allow”. The new 40% FYA is no doubt a cheaper alternative to an extension of full expensing and is more than paid for by another measure announced at the Autumn Budget 2025 – a cut in the main rate of WDA from 18% to 14% from 1 April 2026 for companies and 6 April 2026 for unincorporated businesses. A hybrid rate will apply where the period straddles 1/6 April 2026, calculated by reference to the number of days in the period before and after the change in the rate.
Consolidated example
During the year ended 31 December 2026, a company incurs expenditure of £15m on main rate plant and machinery to be used for leasing. The balance on its main rate pool brought forward at 1 January 2026 is £25m. The full AIA of £1m is available.
| £ | £ | £ | |
| Opening written down value | 25,000,000 | ||
| Additions Less, AIA |
15,000,000 (1,000,000) |
1,000,000 |
|
Less 40% FYA |
14,000,000 (5,600,000) |
5,600,000 |
|
| 8,400,000 | |||
| Less WDAs at 14.99%* | (3,747,500) | 3,747,500 | |
| Transfer to pool (after WDAs) | (8,400,000) | 8,400,000 | |
| Nil | |||
| Closing written down value | 29,652,500 | ||
| Total allowances claimed | 10,347,500 |
* (90/365) x 18% + (275/365) x 14% = 14.99%. Note that where the blended rate produces a percentage with more than two decimal places, it is to be rounded up to the nearest second decimal place.
The changes announced to capital allowances at the Autumn Budget 2025 continue the shift away from gradual deductions (WDA) to upfront deductions (FYAs and the AIA) that gathered pace under the previous Conservative government. It is also worth noting that this is a significant revenue raising measure for the government: the combined effect of both measures – the new 40% FYA and the cut in the main rate of WDAs – is expected to increase tax receipts by over £1bn in 2026/27 alone.
A confused picture
Although tax relief is given earlier under FYAs and the AIA, the number of reliefs available has complicated the capital allowances regime and it is important that businesses and their advisers take care to ensure that they consider all of the options, and that they meet the conditions for the allowance claimed. Some of the key differences are highlighted in the table below.
| New 40% FYA | AIA | Full expensing | 50% FYA | |
| Subject to annual cap | No | Yes, £1m | No | No |
| Main rate expenditure | Yes | Yes | Yes | No |
| Special rate expenditure | No | Yes | No | Yes |
| Assets acquired for leasing | Yes | Yes | No | No |
| Balancing charge on disposal | No | No | Yes | Yes |
It should be remembered that other 100% FYAs are provided for certain types of expenditure or activities, including:
- Fully electric and zero-emission cars (s45D; CA23153).
- P&M for an electric vehicle charging point (s45EA; CA23156).
- P&M for use in a special tax site (s45O; CA23121). A special tax site is a designated area within a freeport or investment zone.
For the FYAs at 1 and 2 above, the legislation states that the expenditure must be incurred on or before 31 March 2026 for companies and 5 April 2026 for individuals. However, the Finance Bill 2025-26 (cl30) extends the relief for a further year.
Each FYA above has its own conditions to satisfy and to complicate matters further, some other FYAs have expired in recent years, including the 130% super-deduction (expenditure incurred before 1 April 2023) and the FYA for zero-emission goods vehicles (expenditure incurred before 1/6 April 2025).
Further changes ahead?
In its corporation tax roadmap, the government acknowledged that the capital allowances regime had suffered from “significant instability and unpredictability in recent years”; promised to maintain the “core structure” of the system; and set out only modest ambitions for change, including dealing with the question of leasing and FYAs.
For that reason, businesses and advisers may now be looking ahead to a period of welcome stability in which to get to grips with the range of capital allowances available to them. However, the surprise Budget announcement of a cut in the main rate of WDA – which is expected to have a negative impact on an estimated 650,000 businesses – suggests that the government could make further changes if the economic outlook worsens.
Richard Jones, Senior Technical Manager – Business Tax, ICAEW
