Budget 2025: what are the main changes to capital allowances?

Capital allowances are a tax relief available to businesses for qualifying expenditure on certain fixed assets (e.g. vans, computers or fixtures in properties). They take the place of depreciation, which is not allowed to be deducted for tax purposes.

Who is impacted?

There have been some changes announced at the Budget which will impact on some unincorporated businesses, those business with historic pools of unrelieved expenditure and leasing businesses.

The changes will potentially impact on businesses subject to income tax (e.g. sole traders, partnerships or those owning commercial property) and companies paying corporation tax.

What is changing?

The new rules will introduce a new permanent first year allowance (FYA) of 40% for main rate expenditure from 1 January 2026 with reduced restrictions compared to other FYAs. The main winners here will be unincorporated businesses who have spent more than their annual investment allowance (£1m) on qualifying expenditure and those leasing assets.

The rate of writing down allowance (WDA) on the main pool of plant and machinery is reducing from 18% to 14% per annum from 1 April 2026 (companies) and 6 April 2026 (unincorporated businesses).

Are there any exclusions?

The new 40% FYA is not available for:

• Overseas leasing
• Second hand assets (however these may qualify for the annual investment allowance)
• Cars

What if your accounting period spans April 2026?

For any business who has a chargeable period which spans 1 or 6 April 2026, a hybrid rate for the WDA will have effect. The hybrid rate will be based on the proportion of a chargeable period falling before the change date and the corresponding proportion falling after the change date.

For example, a business with a year end of 30 September 2026 will have writing down allowances in the main pool of 16%.

What is not changing?

There are no changes to:

• £1m annual investment allowance (AIA) at 100% which continues to be available to unincorporated businesses and companies.
• Full expensing (at 100%) on main pool assets and 50% first year allowances on special rate pool assets which are available to companies only. These FYAs continue to have their own restrictions such as exclusions for leased assets and second-hand assets.
• Writing down allowances on the special rate pool which remain at 6%.

There is currently 100% FYA for electric vehicle charging points and zero emission cars. This FYA was due to end in Spring 2026 but has now been extended to 31 March 2027 (companies) or 5 April 2027 (income tax).

Who are the winners and losers?

For many businesses, who achieve tax relief for most or all of their expenditure in the year of expense via the AIA or full expensing, there may be little or no difference to the timing of their tax relief. They will continue to receive a substantial upfront deduction.

Businesses still claiming WDAs for expenditure incurred in earlier years or who claim WDAs for any expenditure not covered by the AIA, super-deduction or full expensing may be adversely affected by the decrease in the WDA rate. They will receive tax relief slower than under the current rate of WDAs.

The main winners here will be unincorporated businesses who have significant capital expenditure in excess of their £1m AIA limit (e.g. some farmers) and businesses in the leasing sector.