Capital allowances: Where are we now?

Over the decades, capital allowances for plant and machinery (P&M) have been one of the areas of tax that has undergone continual change. Following the abolition of the ‘super-deduction’ (i.e., 130% relief for qualifying expenditure) in April 2023, we seem to have entered an era of relative stability. Since 1 April 2023, ‘full expensing’ (i.e., a first- year allowance (FYA) of 100%) has been available to companies that invest in new, unused P&M that would go in the general pool.

There is a 50% FYA for special rate pool expenditure (such as P&M integral to a building). There is no monetary cap on the qualifying amounts, but some purchases are excluded, notably assets acquired for leasing. For much longer, most businesses have had an annual investment allowance (AIA) of £1 million, also giving 100% relief (although this is not available to partnerships that have a corporate member).

Note that cars (with a few exceptions, such as dual control driving school vehicles) are not eligible for the allowances mentioned above. Before taking office as Chancellor of the Exchequer, Rachel Reeves had confirmed that full expensing and the £1 million AIA limit would stay in place for the whole of this parliament. She has, though, made some tweaks to other aspects of capital Allowances.

Reduction in writing down allowances

The 18% per annum writing down allowance (WDA) on the general pool is reducing to 14% per annum from 1 April 2026 (companies) or 6mApril 2026 (income tax businesses). Where themchargeable period straddles the date of change, the WDA will be calculated by apportioning the rate with reference to the number of days before and after the date of change, rounded up to two decimal places. Thus, the rate of WDA will depend on the business’s year end. The WDA on the special rate pool is unchanged at 6% per annum.

Example: Straddle Ltd

Straddle Ltd, which has a 31 December year end and a general pool balance brought forward at 1 January 2026 of £400,000, would receive a WDA for the year ended 31 December 2026, calculated as follows:

1 Jan 2026 – 31 Mar 2026: 90 days @ 18% p.a. = 4.438%

1 Apr 2026 – 31 Dec 2026: 275 days @ 14% p.a. = 10.548%

14.986% (i.e., 14.99%) 14.99% x £400,000 = £59,960

New FYA

From 1 January 2026, there is a new 40% FYA for expenditure on new and unused general pool P&M, where the purchaser is unable to claim full expensing. It excludes assets for leasing overseas and cars. However, assets bought for leasing to a lessee who is resident in the UK do qualify, as long as the asset is not used for the purpose of earning income from a source outside the UK that is not within the charge to UK tax. Unincorporated businesses would only benefit from this new FYA on expenditure above the AIA limit of £1 million.

Zero-emission cars and electric vehicle charging points

The government has again extended the period of availability of 100% FYA on zero-emission cars and electric vehicle charging points. This extension is for an extra year, running to 1 April 2027 (companies) and 5 April 2027 (income tax businesses). Any business thinking of changing its cars to electric ones should consider doing so before this up-front tax relief expires.

Structures and buildings allowance

This is unchanged, the rate remaining 3% per annum (on a straight-line basis) of qualifying cost.

Practical tip

If your company previously claimed super- deduction or claims full expensing, make sure that any disposal proceeds of that asset are separately identified; they will be treated as taxable profits of your company in the period of disposal, rather than being deducted from the capital allowance pool balance to carry forward.