A new 40% first-year allowance arrived on 1 January 2026 and has been reported almost everywhere as good news for business investment. For a business spending inside the £1m Annual Investment Allowance it is a worse claim than the one it already had, and the change that does land is the one underneath it.
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Two things changed, they were announced on the same day, and the coverage has been almost entirely about the smaller one.
From 1 January 2026 there is a new first-year allowance of 40% on new plant and machinery. From 1 April 2026 for companies, and 6 April 2026 for sole traders and partnerships, the writing down allowance on the main pool fell from 18% to 14%. Both were announced in the policy paper published on 26 November 2025, and both are now law in the Finance Act 2026, which received Royal Assent on 18 March 2026.
The Treasury announced the first of them on the morning it took effect, under the headline that business investment was being boosted.
Saving tax for businesses that are investing is key to building the confidence needed to boost growth.
Taken on its own that is fair enough, and for the businesses the allowance was built for it is a real thing. What makes it worth writing about is the arithmetic sitting underneath. The same policy paper carries the costing, and the Office for Budget Responsibility signed the figures off: +£35m in 2025 to 2026, then +£1,035m, +£1,505m, +£1,490m, +£1,470m and +£1,450m in the years to 2030 to 2031. Every figure is positive. The package raises close to £7bn over six years, because the rate cut takes back more than the new allowance gives away.
That does not make the allowance a trick. It makes it an allowance aimed at somebody, and for most of the businesses we act for that somebody is not them.
The new allowance gives 40% of the cost in the year the expenditure is incurred. The remaining 60% goes into the main pool and is written down from a later chargeable period at the ordinary rate, which is now 14%.
HMRC's Capital Allowances Manual sets out the conditions. The expenditure has to be incurred on or after 1 January 2026, it must not be special rate expenditure, and the plant or machinery "must be unused and not second-hand". Limited use for testing, delivery or demonstration does not break that condition. It is available to businesses within the charge to either Corporation Tax or Income Tax.
Two things are excluded outright, in HMRC's own wording: "Second hand assets will be specifically excluded from the relief" and "Cars will also be excluded from the scope of the new FYA."
What is genuinely new is who can use it. Full expensing, which gives 100%, is available to companies only. The 40% allowance reaches unincorporated businesses and assets bought for leasing, and that is the gap it was written to fill. If you are a sole trader with capital spending above the Annual Investment Allowance limit, or you buy equipment to hire out, this is for you. That is a real group of businesses. It is a much smaller one than the announcement implies.
The Annual Investment Allowance did not change. It is still £1,000,000, it has been since 1 January 2019, and it is available to sole traders, partnerships and limited companies alike. GOV.UK puts what it does in one sentence: "You can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax."
Full value means 100%, in year one. So compare the two on a £20,000 machine bought by a business well inside the limit. Under the AIA, the whole £20,000 comes off this year's taxable profit. Under the new allowance, £8,000 comes off this year and the other £12,000 goes into the main pool, where 14% of it is £1,680 in the following period, and the balance takes many years after that. The relief arrives in the end either way. One of them arrives now.
That is not a clever reading. It is what HMRC says in the same policy paper that introduced the allowance, in the section explaining the background to the measure.
The FYA will be beneficial primarily where the £1 million AIA or existing FYAs (such as full expensing) are unavailable or not preferred.
Read who that sentence is addressed to. It is not the government being talked into a corner by a critic, it is the government's own description of the population its new relief is for: businesses whose spending is not already covered, because they are over £1m or because the existing reliefs do not reach them. If your capital spending in a period is comfortably inside £1m and you are already claiming it in full, the 40% allowance offers you nothing you did not have. It is a slower version of a claim you were already making. That sentence is in the primary source and it is missing from most of what has been written about this.
Here is the change that does reach an ordinary small business, and it is the one that got a footnote.
The main pool is where the cost of assets sits once it has not been relieved in full up front. Everything already in it is now written down at 14% a year instead of 18%. On a main pool of £50,000, the allowance for a full year falls from £9,000 to £7,000. That is £2,000 less relief against taxable profit in that year, on spending that happened long ago and on which no decision is left to make.
Nothing is lost. It is deferred, and HMRC is careful to say that the reduced rate "still enables full relief for the expenditure". That is true, and it is also the whole point: relief you get later is worth less than relief you get now, and a business with a large pool feels the difference in the year it happens.
The government is clearly trying to encourage new investment with the 40% first year allowance, but businesses that have already made their investments will be impacted the most. The reduction in the main rate of writing down allowance means that it will take longer to access the tax relief on existing capital assets.
That describes the client we actually see. Not the business making a big investment decision this quarter, but the one that fitted out its premises three years ago, has been steadily writing the cost down since, and made no decision at all in 2026. It gets a smaller deduction this year because of a measure announced as support for investment. Two other things are worth knowing here, because both are commonly assumed to have moved and neither did: the special rate pool is unchanged at 6%, and the small pools allowance is unchanged at £1,000.
The reason this matters for the accounts rather than only for the tax is that the two carry the same figures. A capital allowance changes taxable profit, not the profit in your accounts, and as we have written before it is taxable profit rather than turnover that normally decides the tax charge.
This is the part that affects the accounts being prepared right now, and it is the reason to write about this in September rather than in January.
If your chargeable period began before the change date and ended on or after it, you do not use 18% and you do not use 14%. You use a blended rate, apportioned by days. That is in the legislation rather than only in guidance. Finance Act 2026 s.28 gives the formula as "X is found by adding (18 x BRD/CP) to (14 x ARD/CP)", where BRD is the number of days before the relevant day, ARD the number on and after it, and CP the days in the period. The relevant day is 1 April 2026 for Corporation Tax and 6 April 2026 for Income Tax.
The same section settles something the guidance leaves looking uncertain: "Where X would be a figure with more than 2 decimal places, it is to be rounded up to the nearest second decimal place." Rounded up, not rounded to the nearest. It is a ceiling.
For a company with a twelve-month period, that works out as follows. The 31 December 2026 figure is HMRC's own published example.
| Year end | Days at 18% | Days at 14% | Rate |
|---|---|---|---|
| 31 March 2026 | 365 | 0 | 18% |
| 30 June 2026 | 274 | 91 | 17.01% |
| 30 September 2026 | 182 | 183 | 16.00% |
| 31 December 2026 | 90 | 275 | 14.99% |
| 31 March 2027 | 0 | 365 | 14% |
Take the 30 June 2026 year end longhand, because it shows why the answer is not a round number. 274 days divided by 365, multiplied by 18, is 13.51233. 91 days divided by 365, multiplied by 14, is 3.49041. Added together that is 17.00274, and rounded up it is 17.01%.
Now the detail that is easy to miss. The same accounting period gives a different rate depending on which tax you pay, because the two change dates are five days apart. A sole trader whose year ran to 30 June 2026 has 279 days before 6 April and 86 days on or after it, which comes out at 17.06% rather than 17.01%. A company and a sole trader with identical year ends and identical pools get different allowances.
HMRC published an eight-step guide and an interactive calculator for this on 1 April 2026, and for once it is worth using rather than working it out by hand. You can calculate your hybrid rate of writing down allowance on GOV.UK by entering which tax you pay and your period dates. If we prepare your year-end accounts this is already handled, but it is a useful thing to be able to check.
Cars are the one place where the two changes land on the same asset, and where most of what has been written about this is wrong.
GOV.UK lists what cars do not get, and the list is now four items long: "annual investment allowance (AIA)", "super-deduction and 50% special rate first-year allowance", "full expensing and 50% first year allowance", and "40% first year allowance". So a car is excluded from the relief that gives 100%, excluded from the relief for companies that gives 100%, and excluded from the new relief that gives 40%. What is left for most cars is the pool.
Here is where the usual version of this story goes wrong. It is often written as though ordinary company cars have been hit. For cars bought from April 2021, GOV.UK puts a new and unused car at 0g/km, or an electric one, on a 100% first-year allowance. A car over 50g/km goes to the special rate pool at 6%, which did not change. A typical new petrol or diesel car is over 50g/km, so it was never in the pool that moved.
The cars that actually feel the cut are the ones in the middle: a car at 50g/km or less, which in practice means many plug-in hybrids, and a second-hand electric car, which GOV.UK puts on main rate allowances rather than the first-year allowance a new one would get. Those now come down at 14% a year instead of 18%. Given how many used electric cars are being bought, that is a live point and almost nobody is making it.
One piece of better news, and it is a 2026 change in its own right. The 100% first-year allowance for new zero-emission cars and for electric vehicle charge points was due to end in 2026 and has been extended by Finance Act 2026 to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax. It has now been extended twice, so whether it runs beyond that is not something to assume either way.
If you are a sole trader reading this and wondering which of it applies to you, the honest answer for many people is very little of it, and the reason is worth knowing.
GOV.UK describes the cash basis as "the standard way to record your income and expenses if you're a sole trader or partnership without corporate partners". Under it, capital allowances work differently, and GOV.UK is blunt about how: "If you're a sole trader or partnership and you use cash basis, you can only claim capital allowances on business cars."
So for a sole trader on the cash basis, the main pool rate cut and the new 40% allowance are both beside the point for equipment, tools and computers, because those are dealt with as they are paid for. The one asset where capital allowances still bite is a car, which brings you straight back to the section above. Whether the cash basis is the right basis for a particular business depends on the circumstances, and it is one of the things worth going through together rather than assuming.
Two things frequently get tangled here. A van is not a car for these rules, so a van can take the Annual Investment Allowance where a car cannot. And if you claim HMRC's flat-rate mileage for a vehicle, you are not also claiming capital allowances on that vehicle. That election is made once per vehicle and it is effectively permanent, so it is a decision to take deliberately rather than discover later.
None of this needs a panic and most of it needs no decision at all. It does need the right rate on the return.
If your accounts are with us, the hybrid rate is already part of preparing them, and it is one of the things a month 9 review is for: knowing what the year is going to look like while there is still time to do something about it. If they are not, and you have a year end between April 2026 and March 2027, it is worth checking that whoever prepares your Corporation Tax return has used the apportioned rate rather than a flat 14%. It is the sort of thing that is quietly wrong and then agrees with itself for years afterwards.
No. The Annual Investment Allowance was not altered by these measures. It remains £1,000,000 at 100%, where it has been since 1 January 2019, and it is available to sole traders, partnerships and limited companies. What changed is the rate applied to expenditure that ends up in the main pool instead, which fell from 18% to 14%. If your capital spending in a period is covered in full by the AIA, the rate cut does not touch that spending, though it will still apply to anything already sitting in your pool from earlier years.
In most cases, yes. The Annual Investment Allowance gives a deduction for the full value of an item that qualifies, up to £1m in the period, and companies may also be able to use full expensing on new and unused plant and machinery. Neither of those was reduced in 2026. Whether a particular purchase qualifies depends on what it is and how it is used, and cars are the main thing that falls outside both.
Where the AIA is available and unused, generally not. The AIA relieves 100% of the cost in the year, and the 40% allowance relieves 40% with the balance going into the main pool at 14% a year. HMRC says in its own policy paper that the new allowance "will be beneficial primarily where the £1 million AIA or existing FYAs (such as full expensing) are unavailable or not preferred". That points at businesses spending above £1m, or at situations where the older reliefs do not reach.
Full expensing gives 100% and is available to companies only. The 40% first-year allowance gives 40% but reaches further: it is open to businesses within the charge to either Corporation Tax or Income Tax, so unincorporated businesses can use it, and it can apply to assets bought for leasing. Both require the plant or machinery to be new and unused, and both exclude cars. The 40% allowance was designed to fill a gap rather than to improve on full expensing.
No. GOV.UK lists the 40% first year allowance among the reliefs that cars do not qualify for, alongside the annual investment allowance, full expensing and the earlier super-deduction. A new and unused car with CO2 emissions of 0g/km, or an electric car, may still attract a 100% first-year allowance of its own, and that allowance has been extended to 31 March 2027 for Corporation Tax and 5 April 2027 for Income Tax. Other cars go into a pool.
Then your period probably straddles the change and you need an apportioned rate rather than 18% or 14%. The rate is worked out by days: the days before the change date at 18% plus the days on and after it at 14%, added together and rounded up to two decimal places. A company with a 30 June 2026 year end lands on 17.01%, and one with a 31 December 2026 year end on 14.99%, which is HMRC's own published example. HMRC has an online calculator that gives the figure from your period dates.
Broadly, with two differences that matter. The rate change takes effect on 6 April 2026 for Income Tax rather than 1 April 2026 for Corporation Tax, so an identical accounting period can produce a different apportioned rate depending on which tax you pay. And a sole trader or partnership using the cash basis can only claim capital allowances on business cars, so for equipment and tools the question may not arise at all.
It depends on what is in your pool rather than on what you bought. If your capital spending is comfortably inside the £1m Annual Investment Allowance and you claim it in full each year, new purchases are largely unaffected. If you carry a sizeable main pool from earlier years, the relief on it now arrives more slowly, and that shows up as a smaller deduction against taxable profit in the year. Nothing is lost permanently, because the expenditure is still relieved in full eventually. It simply takes longer to get there.
Every figure on this page was checked against the sources above on . Rates and thresholds change. If you are reading this long afterwards, check the current position before you act on it.
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