A complete 2026 guide to UK capital allowances: the £1 million Annual Investment Allowance, permanent full expensing, the new 40% First Year Allowance introduced in January 2026, the main pool WDA reduction from 18% to 14%, and how to choose the right allowance for each asset purchase.
Capital allowances are the mechanism HMRC uses to give businesses tax relief on capital expenditure, which is the cost of buying assets like equipment, machinery, vehicles, and IT. Rather than deducting depreciation from your accounting profit, you claim capital allowances on your Corporation Tax return at HMRC’s statutory rates. Get these right, and you can reduce your Corporation Tax bill significantly in years when you invest in your business. Get them wrong, and you leave money on the table.
What Changed in 2026: The Key Updates
Two significant changes apply to capital allowances in 2026:
- Main pool Writing Down Allowance reduced from 18% to 14% from 1 April 2026. This affects assets in the main pool that are not covered by AIA or full expensing, primarily second-hand plant and machinery, and assets where AIA has already been fully used
- New 40% First Year Allowance was introduced from 1 January 2026 for companies on qualifying main rate plant and machinery expenditure. This sits between full expensing (100%) and the reduced WDA (14%) and is intended to cushion the WDA reduction for businesses that cannot access full expensing
All Capital Allowance Rates at a Glance: 2026/27
| Allowance | Rate | Who Can Claim | Cap |
|---|---|---|---|
| Annual Investment Allowance (AIA) | 100% in year of purchase | All businesses (companies and unincorporated) | £1,000,000 per year |
| Full Expensing | 100% in year of purchase | Companies subject to Corporation Tax only | No monetary cap |
| 50% First Year Allowance (special rate) | 50% in year of purchase | Companies subject to Corporation Tax only | No monetary cap |
| New 40% First Year Allowance (from Jan 2026) | 40% in year of purchase | Companies and unincorporated businesses | No monetary cap (restrictions apply) |
| Main pool Writing Down Allowance | 14% per year (from April 2026) | All businesses | No cap |
| Special rate pool WDA | 6% per year | All businesses | No cap |
| Structures and Buildings Allowance | 3% per year (straight line) | All businesses | No cap |
Annual Investment Allowance (AIA): The Go-To Relief for Most Businesses
The Annual Investment Allowance gives 100% tax relief on up to £1 million of qualifying plant and machinery expenditure per year. For the vast majority of small and medium-sized UK businesses spending less than £1 million on equipment in any tax year, AIA is the most straightforward and most valuable capital allowance available. It applies to both companies and unincorporated businesses (sole traders and partnerships). For businesses with qualifying R&D expenditure, additional reliefs may also be available through the R&D tax credits scheme.
AIA applies to most types of plant and machinery, including computers and IT equipment, manufacturing equipment, tools and machinery, commercial vehicles, and fixtures integral to a building. It does not apply to cars (which have their own rules), assets acquired for leasing to others, or assets acquired outside the normal course of business.
Full Expensing: 100% Relief for Companies With No Cap
Full Expensing was made permanent from April 2024 and allows UK limited companies to claim 100% first year relief on qualifying new (not second-hand) main rate plant and machinery with no monetary cap. This is the most generous capital allowance available to companies spending above the £1 million AIA limit, or for companies that want certainty of 100% deduction without sharing the AIA across group companies.
Full Expensing does not apply to second-hand assets, assets provided for leasing, cars, or assets used partly for non-business purposes. For main rate assets that do not qualify for full expensing, primarily second-hand plant and machinery, the AIA or the new 40% FYA (if eligible) or the 14% WDA applies.
The New 40% First Year Allowance (From January 2026)
A new 40% First Year Allowance was introduced from 1 January 2026 for qualifying main rate plant and machinery expenditure. This new FYA was introduced to partially offset the reduction in the main pool WDA from 18% to 14%.
Under this allowance, 40% of the qualifying cost can be deducted in the year of purchase, with the remaining 60% entering the main pool and attracting 14% WDA in subsequent years. The 40% FYA is available to both companies and unincorporated businesses, unlike full expensing which is restricted to companies. However, it does not apply to cars or leased assets, mirroring the restrictions on full expensing.
ℹ️ Which Allowance Should You Use First?
For most businesses spending under £1 million on plant and machinery, the AIA is the simplest and most effective option: 100% relief in the year of purchase with no cap concerns at that level. Companies spending above £1 million should use full expensing for new main rate assets beyond the AIA limit. The 40% FYA is most relevant for unincorporated businesses spending above their AIA limit on qualifying assets, or for specific assets where full expensing is not available. The 14% WDA is the fallback for assets that do not qualify for any of the above.
Capital Allowances on Cars: Different Rules
Cars are treated differently from other business assets for capital allowance purposes. Cars cannot qualify for AIA, full expensing, or the 40% FYA. The rate that applies depends on the car’s CO2 emissions:
| Car Type | Capital Allowance |
|---|---|
| New zero-emission car (0g/km CO2) | 100% First Year Allowance |
| Car with CO2 emissions of 50g/km or below (new or second-hand) | Main pool WDA at 14% |
| Car with CO2 emissions above 50g/km | Special rate pool WDA at 6% |
Worked Example: Equipment Purchase in 2026/27
A small manufacturing company purchases £80,000 of new machinery in its accounting period ending 31 December 2026. The company has no other capital expenditure in the year and no associated companies.
- AIA claimed: £80,000 at 100% = £80,000 deduction from taxable profits
- Company profit before allowances: £120,000
- Profit after AIA: £120,000 – £80,000 = £40,000
- Corporation Tax at small profits rate: £40,000 × 19% = £7,600
- Without AIA, the tax on £120,000 would have been in the marginal relief band at an effective rate of 26.5% on the relevant portion, which is significantly higher
Making a Significant Capital Purchase This Year?
Our team ensures the correct capital allowance is applied to every asset, AIA is maximised before year end, and full expensing or the new 40% FYA is claimed where available. Fixed fee Corporation Tax service for limited companies.
View Corporation Tax ServiceFrequently Asked Questions
What is the Annual Investment Allowance limit for 2026?
The Annual Investment Allowance limit is £1,000,000 per year for 2026/27. This gives 100% first-year tax relief on qualifying plant and machinery expenditure up to that amount. The limit is shared between group companies and between connected businesses. If you have more than one business, both the group AIA sharing rules and connected party rules must be checked before assuming the full £1 million is available to each entity.
What is the main pool WDA rate for 2026?
The main pool Writing Down Allowance rate was reduced from 18% to 14% from 1 April 2026. This applies to assets in the main pool that are not covered by AIA or full expensing, primarily second-hand plant and machinery. The special rate pool WDA remains at 6%. For businesses with existing pool balances, the 14% rate applies to the pool balance at the start of the first accounting period beginning on or after 1 April 2026.
What is the difference between AIA and full expensing?
Both give 100% tax relief in the year of purchase, but they have different eligibility rules. AIA is available to all businesses, including companies, sole traders, and partnerships, on up to £1 million of qualifying expenditure per year. Full expensing is available only to companies subject to Corporation Tax, with no monetary cap, but applies only to new (not second-hand) qualifying main rate plant and machinery and excludes leased assets. For a company spending less than £1 million on new qualifying assets, either works, but AIA is simpler and available from day one of the business.
Can I claim capital allowances on a company car?
Yes, but through different rules from other plant and machinery. Cars cannot claim AIA or full expensing. A new zero-emission car qualifies for a 100% First Year Allowance. Cars with CO2 emissions of 50g/km or below go into the main pool at 14% WDA. Cars with emissions above 50g/km go into the special rate pool at 6% WDA. The private use proportion of the car, if it is used partly for personal journeys, restricts the allowable capital allowance claim proportionally.
Muhammad Bilal is a Fellow Chartered Certified Accountant (FCCA) and Director of Protax Consultants, a London-based accounting firm specialising in tax advisory, compliance, and business accounting services.
Bilal qualified with the Association of Chartered Certified Accountants (ACCA) in 2009 and later achieved FCCA status after gaining extensive professional experience. With more than 13 years of experience in accounting, taxation, and auditing, he advises SMEs, landlords, contractors, and charities on tax planning, compliance, and financial management.
As a registered HMRC agent, Bilal assists clients with Self Assessment tax returns, corporation tax planning, VAT compliance, payroll services, and HMRC enquiries.
Bilal holds a BSc (Hons) in Applied Accounting and leads the audit and compliance function at Protax Consultants.
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