Capital allowances – Rachel Reeves gives and she takes away

The key capital allowance reliefs utilised by most businesses remained unchanged following today’s Budget. Businesses are still able to claim relief at 100% for the first £1m of qualifying capital expenditure on plant and equipment (the Annual Investment Allowance or “AIA”). Similarly, the reliefs available for larger corporate businesses spending over £1m a year – the so co called “full expensing relief” – are also unchanged.

There have been no changes to other capital allowances, such as for structures and building allowances and those plant assets integral to buildings.

Where there has been some change is in respect of the writing down allowance applicable to any plant and machinery pool balances, which is reduced from 18% to 14% with effect from 1 April 2026 for companies and 6 April 2026 for sole traders and partnerships.

The compensation here is there will be a new 40% First Year Allowance for capital expenditure not covered by the AIA or full expensing. This allowance specifically applies to new equipment and does not cover cars. Given the AIA and full expensing remain in place this is a very targeted allowance applicable only to unincorporated businesses and leasing companies who do not benefit from full expensing. This new allowance comes into effect from 1 January 2026.

With the aim of continuing to encouragement investment in electric vehicles, the 100% First Year Allowance available for purchases of zero emission cars and installations of electric vehicle charging points has been extended by a further 12 months. These incentives are now scheduled to end on 31 March 2027 for companies and 5 April 2027 for sole traders and partnerships.