Every year, UK businesses spend thousands of pounds on equipment and machinery, computers, tools, vehicles, and manufacturing assets without claiming the full tax relief they are entitled to. Some miss the deadline. Others simply don’t know the rules have changed.

That’s a serious problem. Leaving deductions on the table means paying more corporation tax or income tax than you legally owe. With HMRC processing over 32 million tax returns annually, underclaiming is far more common than most business owners realise.

A new First Year Allowance came into force in January 2026, and it applies to sole traders, partnerships, limited companies, contractors, and landlords across the UK. If you’ve invested in plant or machinery since the start of 2026, this relief could reduce your tax bill significantly right now.

Here’s everything you need to know.

What Are First-Year Allowances?

First Year Allowances let businesses deduct a percentage of qualifying capital expenditures from their taxable profits in the same year the purchase is made, rather than spreading relief across several years.

A new permanent 40% allowance for qualifying plant and machinery took effect from 1 January 2026 as part of the Autumn Budget 2025. This is not a temporary measure. It is a permanent addition to the UK capital allowances framework.

Before this change, most businesses outside the full expensing regime could only claim Writing Down Allowances (WDAs), a slower annual deduction applied on a reducing balance. In April 2026, the main rate of WDA for plant or machinery dropped from 18% to 14%, meaning businesses that do not claim upfront relief now see slower tax recovery on their assets over time.

The new 40% relief directly addresses that problem. It gives businesses an accelerated deduction, improving cash flow and reducing current-year tax liability.

How Do First Year Allowances Fit Into the Wider Capital Allowances Framework?

The UK currently offers three main routes for capital allowances on plant and machinery:

• Annual Investment Allowance (AIA): Gives 100% relief on qualifying expenditure up to £1 million per year. Available to sole traders, partnerships, and limited companies. For most smaller businesses, the AIA will cover all qualifying purchases.
• Full Expensing: Gives limited companies 100% relief on qualifying new main-rate plant and machinery with no upper spending limit. Not available to unincorporated businesses or for leased assets.
• The New 40% First Year Allowance: Covers expenditure beyond AIA limits, leased assets, and purchases made by sole traders and partnerships who have exhausted their AIA. This is where this relief fills a genuine gap in the system.

You should claim your AIA first, then use the 40% allowance for any qualifying expenditure that falls outside the £1 million annual threshold.

What Equipment Qualifies for First-Year Allowances?

Qualifying assets are new, unused items of plant or machinery allocated to the main capital allowances pool. Expenses must be related to plant or machinery that is not categorised as a special rate expenditure and must be incurred on or after January 1, 2026. Under HMRC regulations, second-hand assets are expressly prohibited.

Assets That Typically Qualify

Businesses commonly claim relief on:

• Office equipment and computers
• Manufacturing and production machinery
• Tools and specialist trade equipment
• Vans and commercial vehicles (not cars)
• Fixtures, fittings, and furniture used in the trade
• Equipment purchased for leasing to UK businesses

Assets That Do Not Qualify

Several asset categories fall outside the new 40% relief. The relief applies only to new expenditure on eligible main-rate pool assets and specifically excludes special-rate pool assets, second-hand assets, and cars.

Special-rate expenditure covers assets such as long-life assets with a useful economic life of more than 25 years. These fall into a separate pool with different relief rules, and no equivalent relief applies.

What About Leased Assets?

This is one of the most significant changes introduced alongside the new allowance. Previously, businesses buying assets to lease out were excluded from first-year relief entirely.

Under the new rules, the 40% relief includes reduced restrictions compared to earlier allowances, specifically to encourage investment where other reliefs are not available. That includes assets bought for leasing and expenditure by unincorporated businesses. Overseas leasing remains excluded, but domestic leasing now qualifies.

This is a meaningful development for equipment finance businesses, plant hire companies, and contractors who hold assets within a limited company or LLP.

How It Actually Works

First Year Allowances are straightforward in practice, but understanding the mechanics matters, especially when combining them with other reliefs.

Step 1: Claim your AIA first. Use the Annual Investment Allowance to deduct 100% of qualifying expenditure up to £1 million. This gives the fastest possible relief.

Step 2: Apply the 40% Allowance to the remainder. Any qualifying expenditure beyond the AIA threshold gets a 40% deduction in year one.

Step 3: The remaining 60% enters the main pool. From 2026/27, Writing Down Allowances apply at 14% per year on the reducing balance of whatever remains after step two.

The deduction reduces your taxable profit, which in turn reduces your corporation tax (currently 25% for most companies) or your income tax liability for sole traders and partnerships.

Which Tax Are You Reducing?

For limited companies, a lower taxable profit means less corporation tax at 25%. For sole traders and self-employed individuals filing a Self Assessment return, the same deduction reduces income tax at 20%, 40%, or 45%, depending on earnings.

This is why timing matters. A higher-rate taxpayer claiming allowances on a £50,000 purchase saves significantly more than a basic-rate taxpayer making the same investment.

The Real-World Tax Saving: A Simple Example

Here is a clear illustration of how it works for a small manufacturing business.

Scenario: A sole trader purchases new machinery costing £100,000 in May 2026. Their AIA is already fully used for the year. They have no full expensing entitlement as an unincorporated business.

Without this relief, the entire £100,000 would enter the main pool and attract a WDA of 14%, producing a deduction of just £14,000 in year one.

With the 40% allowance applied:

• Year 1 deduction: £40,000 
• Remaining balance entering the main pool: £60,000
• WDA at 14% in Year 2: £8,400

In year one alone, the business claims £40,000 instead of £14,000. At the higher income tax rate of 40%, that is a cash tax saving of £16,000 versus £5,600, a difference of £10,400 in the first year alone.

That extra cash stays in the business. It can fund hiring, stock, marketing, or simply strengthen the owner’s financial position.

For a VAT-registered contractor buying £30,000 of new equipment after exhausting their AIA, the same logic applies. First-year allowances generate a £12,000 deduction at the basic rate, saving £2,400 in income tax recovered within the same tax year.

Timing Your Purchase: Why It Matters

Getting the timing right is one of the most practical ways to maximise first-year allowances. The start date depends on whether you pay corporation tax or income tax.

Corporation Tax: 1 January 2026

For corporation tax purposes, expenditure incurred from 1 January 2026 qualifies for first-year allowances. Limited companies that purchased qualifying plant and machinery on or after this date can already claim. If you have not yet reviewed your capital purchases from early 2026 onwards, do so before your next corporation tax return.

Income Tax: 6 April 2026

For unincorporated businesses within income tax, including sole traders, partnerships, and LLPs, first-year allowances apply from 6 April 2026. Self-employed individuals who bought qualifying assets before the new tax year began cannot claim on those purchases. Assets acquired on or after 6 April 2026 are eligible.

Impact of Lower Writing Down Allowance

With the writing-down allowance dropping from 18% to 14%, assets that miss the first-year allowances window now attract significantly slower relief. A £100,000 asset in the main pool at 18% WDA recovered £18,000 in year one. At 14%, that drops to £14,000. Over five years, the cumulative difference compounds.

Claiming first-year allowances, where available, front-loads your relief and compensates for the reduced annual WDA rate. This is especially relevant for businesses whose capital spending exceeds the £1 million AIA threshold.

Anti-Avoidance Rules Apply

HMRC has confirmed that expenditure will not qualify for allowances where it arises directly or indirectly from arrangements designed to secure a tax advantage. In plain terms, HMRC will scrutinise arrangements that appear structured purely to generate claims rather than reflect genuine commercial investment.

Maintaining proper documentation, including purchase invoices, asset records, and evidence of business use, is essential. HMRC guidance emphasises that businesses claiming first-year allowances must be able to demonstrate that qualifying conditions are met, particularly for leased assets.

How to Claim

Claims are made through your tax return in the standard capital allowances section. No separate application to HMRC is required.

For limited companies, the claim appears within your corporation tax return (CT600). For sole traders and self-employed individuals, allowances are reported on the Self Assessment return (SA100/SA103).

You do need to calculate the claim correctly and include the right figures. Errors in capital allowance calculations are among the most common reasons HMRC opens compliance checks into small business tax returns.

If you use an accountant, your relief should be calculated and optimised as part of your annual accounts. If you file your own returns, review HMRC’s Capital Allowances guidance on GOV.UK and cross-check that you have not missed qualifying expenditure.

Working with a professional accounting team also ensures you claim allowances in the most tax-efficient order: full expensing first for companies, then AIA, then allowances. That sequencing can make a meaningful difference to the size of your year-one deduction.

Is Your Business Claiming First Year Allowances?

Many UK businesses, from startups buying their first computers to established manufacturers investing in production lines, are sitting on unclaimed relief right now. The 40% allowance is new, permanent, and available across a broader range of businesses than previous allowances.

Used correctly, First Year Allowances can meaningfully reduce your current-year tax bill, improve cash flow, and free up capital for reinvestment. Combined with a well-structured approach to the AIA and, where applicable, full expensing, the potential savings are substantial.

If you have not yet reviewed your capital allowances position for 2026/27, now is the right time. A qualified accountant will assess your qualifying expenditure, identify the most tax-efficient order to apply available reliefs, and ensure your return is accurate and compliant with HMRC rules.