Capital Allowances were touched on briefly at the beginning of the chancellor’s speech and further detail has been revealed in the documentation released post-budget.
Introduction of 40% first year allowances
The chancellor announced the introduction of a 40% first year allowance (FYA) on main rate capital expenditure, starting from 1 January 2026. This will be available to both incorporated and unincorporated businesses and unlike other existing reliefs, is also available on assets bought to be leased.
Full Expensing, which is another first year allowance introduced in Spring 2023, remains available to limited companies and attracts relief at 100% in the year of purchase. In order to qualify for Full Expensing, it is important that the asset is bought new and unused and not bought to be leased out.
The Annual Investment Allowance (AIA) also remains available on most capital assets (exceptions exist such as cars and assets which are bought to be leased out) and also attracts 100% relief in the year of purchase. The Annual Investment Allowance is capped at £1million per year.
This means that the new 40% first year allowance will only be necessary where either the entire £1million limit is being used up or the asset is one that qualifies for the new first year allowance but not the existing reliefs.
Reduction of writing down allowances
Assets not qualifying for either First Year Allowances or AIA are pooled, attracting a percentage of tax relief on a reducing balance basis. Most assets fall into the main pool with exceptions such as integral features of a building and cars with emissions over 50g/km which go to the special rate pool.
The change made in the Autumn Budget was the reduction of the main pool rate from 18% down to 14%. This change is effective from 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax. The special rate pool rate remains at 6%.
If you have any questions about how the budget might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.
