UK 40% first-year allowance starts 1 January 2026

From today, Thursday 1 January 2026, the UK brings in a permanent 40% first‑year allowance for spending on main‑rate plant and machinery. First flagged at Budget 2025, it gives more of the tax relief up front when you invest from this date. We’re going to keep this simple and show you how it works in practice.

Who can use it? All businesses, not just companies. It also covers assets you buy to lease out, a group that could not access full expensing before. There are clear guardrails: the asset must be new and not a car, and second‑hand purchases do not qualify. Leasing outside the UK is excluded.

How does it sit alongside the other reliefs you may have heard about? Full expensing stays in place for companies buying qualifying main‑rate assets that are new and not bought to lease out, giving a 100% year‑one deduction. On the government’s own example, that can cut tax by up to 25p per £1 at a 25% corporation tax rate. The new 40% allowance fills gaps where full expensing or the AIA is not available or not the route you choose.

One change arrives slightly later and you need to plan for it. The main‑rate writing‑down allowance (the annual relief on the pool) drops from 18% to 14% from 1 April 2026 for corporation tax and 6 April 2026 for income tax. If your accounting period crosses those dates, HMRC applies a blended ‘hybrid’ rate for that period.

Think of your toolkit this way in 2026: full expensing for companies, the £1 million Annual Investment Allowance for most businesses, and now a 40% first‑year allowance where those aren’t available or preferred. The Treasury also describes the UK as offering one of the most generous regimes globally, citing a top OECD ranking for plant and machinery allowances.

Worked example 1 (company, asset for leasing): You buy a new £100,000 machine on 1 January 2026 to lease to customers. Before today, you couldn’t full‑expense assets bought to lease out, so you’d typically claim only WDAs. For a year ending 31 December 2026, the time‑weighted main‑rate WDA is about 15%, so you’d deduct roughly £15,000 and save around £3,750 in tax at a 25% rate. With the new 40% allowance, you deduct £40,000 immediately; the remaining £60,000 goes into the main pool and gets about £9,000 of WDA in that first year. Total year‑one deduction about £49,000; the tax saving is roughly £12,250-around £8,500 more cash‑flow than under the old rules. Figures are illustrative.

Worked example 2 (sole trader, choosing between AIA and the new allowance): You buy £120,000 of new equipment (not a car) on 10 January 2026. If you have AIA headroom, claiming AIA gives a full £120,000 deduction in year one; at a 40% marginal rate that’s up to £48,000 off your bill. Using the new 40% allowance instead would give a £48,000 first‑year deduction, with the rest relieved over time. If AIA is available, it will usually be the faster cash‑flow option.

Worked example 3 (bigger spend, blending reliefs): You invest £1.2 million in qualifying kit this year as a company using the assets yourself. You could claim AIA on the first £1 million and, if the remaining £200,000 doesn’t qualify for full expensing, claim the new 40% allowance on that balance. That gives £1,080,000 in year‑one deductions, with the remaining £120,000 entering the main pool for WDAs. This is how the new rule can work alongside what already exists.

Mind the exclusions and your paperwork. The 40% allowance applies to new, unused assets; cars and second‑hand purchases are out, and overseas leasing is specifically excluded. Keep clear records: purchase dates, descriptions, first‑use dates and whether assets are leased out. HMRC relies on those details for first‑year claims.

Your timeline in plain English: the 40% allowance covers spending incurred from 1 January 2026. The main‑rate WDA drops to 14% from 1 April 2026 for corporation tax and 6 April 2026 for income tax. If your period straddles those dates, expect a blended rate. Full expensing and the £1 million AIA continue to be available in parallel. Use these examples as a learning aid, and take advice for your own numbers.