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      In Autumn Budget 2025, the Chancellor unveiled two changes to the capital allowances regime aimed at saving money for the Exchequer while continuing to incentivise investment by UK businesses.

      The current capital allowances landscape includes 100 percent first year allowances (FYA) for main pool expenditure under the full expensing regime. This is being kept in place but it has a number of exclusions, including for assets which are provided for leasing and expenditure incurred by unincorporated businesses within the scope of income tax.

      The Budget sought to partially address these gaps by introducing, from January 2026, a new 40 percent FYA for expenditure qualifying for main pool plant and machinery allowances incurred by UK businesses. The 40 percent FYA is specifically for assets provided for leasing within the UK, and expenditure incurred by unincorporated businesses. It is expected that the 40 percent FYA would not apply if the lease were a long funding lease or hire purchase (HP) arrangement (in which cases capital allowances would not be in point for the lessor and 100 percent full expensing should be available to the lessee).

      On the flip side, the Chancellor reduced the writing down allowance (WDA) for main pool expenditure (where FYAs have not been claimed) from 18 percent to 14 percent from April 2026. This will represent an effective cash tax increase for businesses with large historic pool balances relying on the WDA to reduce their tax liability in future periods.

      Michael Everett - Director, Fixed Asset Tax Services
      Michael Everett

      Director, International Corporate Tax

      KPMG in the UK

      The changes are likely to have a substantial impact for large lessors of plant and machinery, who up until now have been largely excluded from the opportunity to claim FYAs. It should also have the effect of reducing funding costs for lessees, where the benefit of increased capital allowances can be factored into the lease costs, sharing the benefit of the new FYA between lessor and lessee.

      It will be important to confirm whether the assets do in fact qualify for main pool allowances, however, as at this stage it appears there is no corresponding FYA for special rate expenditure such as long life assets (which have a useful economic life of 25 years or more).

      Unincorporated businesses will also welcome the move, although it does fall some way short of a full equalisation with the full expensing regime enjoyed by companies within the charge to corporation tax. It should be noted that, in most cases, the Annual Investment Allowance (AIA) of £1 million will provide first year relief for plant and machinery expenditure so it will only be those businesses spending over this limit or where AIA is unavailable (e.g. individual partners in mixed partnerships) where this relief will have a substantial benefit.

      Where full expensing is available, the main pool WDA rate change makes it more critical than ever that businesses ensure they make the most of the enhanced reliefs available to them, as the differential between the 100 percent FYA and the 14 percent WDA is now even greater. For businesses undertaking substantial projects, this will mean considering the review of expenditure in the period in which it is incurred, rather than waiting until the project is complete, which risks missing out on the accelerated relief.

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