Capital allowances update
Capital allowances on plant and machinery (P&M) have seen constant change over the years. However, following recent reforms, we are now entering a period of relative stability—with some important updates.
If your business is planning to invest in equipment, vehicles, or infrastructure, understanding these rules is key to maximising tax relief and improving cash flow.
Full expensing: Still the most valuable relief
Since 1 April 2023, companies have been able to claim full expensing, which provides:
- 100% first-year tax relief
- On new and unused plant and machinery
- With no upper limit on expenditure
This applies to most assets in the main pool, which includes standard business equipment.
What about special rate assets?
For assets in the special rate pool (e.g. integral features of buildings):
- A 50% first-year allowance (FYA) is available
This provides accelerated relief, although not as generous as full expensing.
Annual Investment Allowance (AIA): Still £1 million
The AIA remains at £1 million, and continues to be a key relief for:
- Companies
- Sole traders
- Partnerships
It provides:
- 100% tax relief on qualifying expenditure
- On both new and second-hand assets
Important exclusions to remember
Not all assets qualify for these generous reliefs.
Key exclusions include:
- Cars (with limited exceptions)
- Certain leased assets (depending on structure)
Understanding these exclusions is critical when planning purchases.
New from January 2026: 40% first-year allowance
From 1 January 2026, a new 40% first-year allowance has been introduced.
This applies where:
- Full expensing is not available
- The asset is new and unused
- It would normally fall into the main pool
Who benefits most?
This new allowance is particularly relevant for:
- Businesses that cannot claim full expensing
- Certain leasing arrangements
- Situations where assets are used in specific structures
Leasing rules: A key detail
The new 40% allowance:
- Excludes assets leased overseas
- But allows assets leased within the UK, provided:
- The income remains within the UK tax system
This is an important distinction for businesses operating across borders.
What about unincorporated businesses?
For sole traders and partnerships:
- The £1 million AIA still provides 100% relief
- The new 40% FYA generally only applies above the AIA limit
So in most cases:
AIA will remain the primary relief for unincorporated businesses.
Electric vehicles: 100% relief extended
The government has extended the 100% first-year allowance for:
- Zero-emission cars
- Electric vehicle charging points
This is now available until:
- 1 April 2027 (companies)
- 5 April 2027 (income tax businesses)
Planning opportunity
If you are considering switching to electric vehicles:
Acting before these deadlines could secure significant upfront tax relief.
Structures and Buildings Allowance (SBA)
The Structures and Buildings Allowance remains unchanged:
- Relief at 3% per year
- On qualifying construction and building costs
While slower than other allowances, it still provides valuable long-term relief.
Should you claim everything upfront?
Not always.
Although 100% relief is attractive, there are situations where:
- Spreading relief may be more tax-efficient
- Profits are low in the current year
- Future tax rates or income may be higher
Capital allowances are flexible, and claims can be tailored.
Practical tips for business owners
To maximise your tax position:
- Review planned capital expenditure early
- Choose the most appropriate allowance (AIA vs full expensing vs FYA)
- Consider timing of purchases across tax years
- Understand leasing and asset classification rules
- Seek advice before large investments
Final thoughts
Capital allowances remain one of the most powerful tools for:
- Reducing taxable profits
- Improving cash flow
- Supporting business growth
With new rules from January 2026, careful planning is more important than ever.
Need help with capital allowances planning?
At Merranti Accounting, we help businesses:
- Maximise available tax reliefs
- Plan capital investment efficiently
- Navigate complex tax rules
If you’re planning significant expenditure, get in touch with our team to ensure you’re making the most of the available reliefs.
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