The 40% first-year allowance

From January 2026, businesses investing in plant and machinery could benefit from a new form of accelerated tax relief: the 40% first year allowance (FYA). 

Introduced as part of the government’s broader capital allowances strategy, the measure is intended to encourage investment by providing faster relief in cases where full upfront deductions are not available.

While it sits alongside existing reliefs such as the Annual Investment Allowance (AIA) and full expensing, the 40% FYA fills an important gap. For many businesses, particularly those that have historically relied on writing down allowances, the 40% FYA introduces a new planning option. It offers a middle ground between gradual and immediate relief, creating greater flexibility and opening new planning opportunities.

What is the new 40% first year allowance?

This FYA allows businesses to deduct 40% of the cost of qualifying expenditure from taxable profits in the year an asset is acquired. It applies to new and unused main rate plant and machinery purchased on or after 1 January 2026, subject to specific conditions. Unlike writing down allowances (WDAs), which spread relief over several years, the 40% FYA accelerates relief into the first year, while the remaining balance continues to be relieved under the normal capital allowance rules.

Who will benefit from the 40% FYA?

The 40% FYA may be particularly relevant for businesses that have historically had more limited access to accelerated reliefs. Unincorporated businesses, including sole traders and partnerships, are not eligible for full expensing, which is only available for corporation tax purposes. For these businesses, the 40% FYA may provide an accelerated alternative where AIA is unavailable or has already been utilised. The allowance may also be relevant for leasing and rental businesses, although entitlement for expenditure on assets provided for lease remains subject to specific statutory conditions and exclusions. Assets acquired for leasing have historically been excluded from some first-year reliefs, so the new allowance may broaden access in certain circumstances. However, eligibility will depend on the detailed rules in each case.

How does the 40% FYA compare with other allowances?

The introduction of another relief option inevitably raises the question of which allowance should be used, and when?

• Annual Investment Allowance (AIA): Provides 100% relief on qualifying expenditure up to the annual limit. Where available and unused, it generally offers the fastest relief.
• Full expensing: Available to companies only, allowing 100% relief on qualifying expenditure, but subject to exclusions.
• FYA: Provides partial but immediate relief where AIA or full expensing is unavailable, restricted, or not the most appropriate relief in the circumstances.

The 40% FYA applies only to new and unused assets and main rate plant and machinery. It does not apply to cars or second-hand assets. These boundaries are critical, as eligibility depends on strict statutory definitions, and incorrect assumptions can easily lead to invalid claims.

When might the 40% FYA be the most suitable option?

The 40% FYA may be relevant where AIA is not available or has already been fully utilised, full expensing does not apply, or accelerated relief is still desirable compared with relying solely on writing down allowances.

However, where AIA or full expensing is available, these reliefs will often deliver a faster and more complete deduction in the year of investment. The 40% FYA does not replace existing reliefs but rather complements them, covering situations they do not. Determining the optimal approach requires careful consideration of the nature of the asset, the business structure, and how different reliefs interact within the wider tax position.

Planning considerations for 2026 and beyond

As with all capital allowances, effective planning begins well before expenditure is incurred. 

• Timing of investment: The 40% FYA applies to expenditure from 1 January 2026, meaning the timing of asset acquisition can affect the availability and how quickly tax relief is obtained.
• Asset classification: Correctly identifying whether assets qualify as new, unused, and main rate plant and machinery is essential. Misclassification may result in incorrect claims and potential compliance risks.
• Integration with wider capital allowance strategy: The 40% FYA should be considered as part of a holistic capital allowances review, taking into account existing pool balances, anticipated future investment and the interaction with writing down allowances following the 2026 rate reduction.

A strategic midpoint in capital allowance planning

The 40% first year allowance sits between full upfront relief and longer-term writing-down allowances. In the right circumstances, it may offer a useful additional option for businesses with more complex or restricted capital allowance profiles.

Used appropriately, the 40% FYA can improve the timing of tax deductions and support more informed investment decisions - particularly where other accelerated reliefs are unavailable or limited.

With multiple reliefs now operating side by side, identifying the most effective capital allowance route is rarely straightforward. A structured review of asset eligibility, expenditure timing, and existing allowance pools can often unlock improved outcomes without altering commercial objectives. If you would like to discuss how the 40% first year allowance fits into your wider tax planning, or review whether your capital expenditure is being relieved as efficiently as possible, please reach out to your usual Crowe contact.